Target Healthc. Regulatory News (THRL)

27 January 2022

Target Healthcare REIT plc and its subsidiaries

("Target Healthcare" or "the Group")

Net Asset Value, update on corporate activity and dividend declaration

Target Healthcare (LSE: THRL), the UK listed specialist investor in modern, purpose-built care homes, announces its unaudited quarterly Net Asset Value ('NAV') as at 31 December 2021, together with an update on corporate activity, and declares its second interim dividend for the year ending 30 June 2022.

Corporate activity highlights

Significant portfolio acquisition, further strengthening of balance sheet with additional long-term fixed-rate debt secured

· EPRA Net Tangible Assets ('NTA') per share marginally decreased by 0.4% to 110.8 pence (30 September 2021: 111.3 pence) reflecting non-recurring acquisition costs on £173 million of new investments in the quarter, including, on 20 December 2021, a portfolio of 18 homes which represents the Group's first acquisition at this scale

· The Group's portfolio value and earnings continued to increase, generating a NAV total return of 1.0% for the quarter (based on EPRA NTA and including dividend)

· £173 million deployed with 19 assets acquired during the quarter. The 18-asset portfolio is generating £9.3 million of annual rental income immediately from a diversified tenant group, increases the portfolio size by c.20% and will deliver earnings growth compared to the current quarter

· £100 million of new long-term debt drawn at an attractive weighted fixed rate of 3.14% and a weighted average term of 13.2 years to (i) fix a significant proportion of the Group's debt at low interest rates in the face of an uncertain outlook (ii) free-up flexible facilities to give investment headroom which can be used to increase gearing and manage cash drag; and (iii) strengthen the balance sheet via increased duration of guaranteed facilities

· Net LTV, including the post period end acquisition, is 20.7%, up from 1.0% at 30 September 2021 (at which point the LTV had been temporarily reduced by the recent equity issuance). The investible capital available (comprising cash and undrawn debt) at 27 January 2022 is £82 million, which is allocated to an identified pipeline in late-stage diligence. All else being equal, on completion of these acquisitions and the developments currently in progress, the Group's pro forma LTV would be 32%

Portfolio performance

· 1.3% increase in the like-for-like value of the operational portfolio; total property portfolio value of £870.5 million and an EPRA "topped-up" net initial yield of 5.84%

· 17 rent reviews were completed at an average uplift of 4.0% per annum, contributing a 1.0% increase in like-for-like contractual rent

· Weighted average unexpired lease term across the portfolio, including the effect of acquisitions, decreased slightly to 27.5 years (30 September 2021: 28.8 years) remaining one of the longest within the listed real estate sector

· Substantially all of the portfolio's leases provide upwards-only rent reviews annually, providing consistent rental growth and a linkage to inflation, subject to the caps and collars

· Resilient rent collection performance during the most recent period consistent with prior quarters, demonstrating the secure and stable nature of the portfolio's cashflows

· Diversified rental income, with 31 tenants across the portfolio and a further two to be added through both an acquisition post period end and from when one of the Group's development sites becomes operational in the second half of 2022

· Following 12 months of recovering occupancy levels, an enforced reduction in staffing levels from isolation requirements and outbreaks caused by the Omicron variant have seen this recovery slow. Our tenants continue to report strong enquiry levels from potential residents and anticipate occupancy increases to resume as the Omicron peak subsides. Reported COVID-19 cases amongst residents have increased in-line with levels seen in the first wave, with reported symptoms typically mild

Other acquisitions and asset management

· Two acquisitions in addition to the 18-home portfolio, totalling £21 million and adding two new tenants to the portfolio:

o On 11 October 2021, the Group acquired a pre-let development site subject to a forward funding agreement, to construct a 66-bed care home in Weymouth, Dorset.

o Post period-end, the Group acquired a 55-bed modern, purpose-built operational care home in Westhoughton, greater Manchester, let to Harbour Healthcare, a new tenant to the Group.

· The Group has resolved the position with the remaining home of one of the previous tenants who had already been in financial distress prior to the COVID-19 pandemic, with a new lease to a new tenant. The landlord will now progress the capex investment envisaged by the Group since acquisition thereby further enhancing the real estate.

Dividend

· Second interim dividend of 1.69 pence per share declared for the year ending 30 June 2022, representing an increase of 0.6% on the FY 2021 quarterly dividends. On an annualised basis, this reflects a payment of 6.76 pence per share and a dividend yield of 5.9% based on the closing share price of 114.6 pence on 26 January 2022

Kenneth MacKenzie, CEO of Target Fund Managers, commented:

"The highlight of the period was completing the 18-home acquisition, which continued our track record of putting the capital raised from our widening shareholder base to good use. The transaction grows the portfolio size by c.20% and adds high quality real estate, whilst increasing our proportion of homes with a multi-year track record of strong trading performance. As importantly, the acquired portfolio's strong sustainability credentials align with our long-standing social impact and environmental focus. The £9.3 million of annualised contracted rent will support a material improvement in dividend cover, a strategic priority for the Group, with ongoing benefits due to its inflation linked characteristics. Our additional £100 million of long-term debt is an attractive financing option when its fixed costs are considered against these annual rental uplifts."

"The sector's long-term fundamentals remain highly compelling, and we are well placed to capitalise on these through our broadening occupier mix and balance sheet strength. In our role as an engaged landlord, we have worked closely with all our tenants as they have dealt with challenges of the latest Covid outbreak. We are tentatively confident that we are through the worst and that the portfolio is well-placed to perform through 2022, albeit the pandemic's residual effects may result in some limited asset management initiatives being required in the short-term to protect income and value."

Net Total Assets

The Group's unaudited EPRA NTA per share as at 31 December 2021 was 110.8 pence. The total return for the quarter based on EPRA NTA was 1.0%.

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

Corporate Update

Portfolio performance

As at 31 December 2021, the Group's portfolio was valued at £870.5 million and comprised 98 properties, consisting of 94 operational care homes and four pre-let sites, which are being developed through capped forward funding commitments with established development partners.

The portfolio value increased by 23.9% over the quarter. This comprised a 21.5% increase resulting from acquisitions, 1.3% from a like-for-like uplift in the operational portfolio value and an increase of 1.1% from further investment into the development portfolio and capital expenditure on existing assets. The like-for-like movement primarily reflects the portfolio's inflation-linked rental reviews as well as continued modest yield compression in the investment market for modern, purpose-built care homes.

Contractual rent increased by 23.6% over the period, comprising:

· 21.5% from acquisitions

· 1.0% from 17 inflation-linked upwards-only rent reviews, with an average uplift of 4.0%

· 1.1% from successful asset management initiatives

The portfolio's weighted average unexpired lease term reduced slightly to 27.5 years (30 September 2021: 28.8 years).

The portfolio had an EPRA topped-up net initial yield of 5.84% based on an annualised contractual rent of £53.4 million. The portfolio's EPRA net initial yield was 5.58% with five assets in rent-free periods.

Acquisitions and asset management

In addition to the 18-asset portfolio acquisition detailed above (and in the announcement dated 20 December 2021):

· On 11 October 2021, as previously announced, the Group acquired a pre-let development site subject to a forward funding agreement to construct a 66-bed care home in Weymouth, Dorset for a maximum commitment of £14.3 million including acquisition costs. Construction on the home has commenced and is expected to be completed in the second half of 2022.

· On 7 January 2022, the Group completed the acquisition of a modern, purpose-built care home in Westhoughton, greater Manchester, for £7.2 million including acquisition costs. The home has been trading for seven years with an attractive track record of care/service, occupancy and profitability. It will be operated by Harbour Healthcare, new to the home and a new tenant to the Group, and comprises 55 bedrooms with full en suite facilities, in line with the Group's strict investment criteria. The property is leased on a 35-year term with RPI-linked increases, subject to a cap and collar.

· The Group has resolved the position with the remaining home of one of the previous tenants who had already been in financial distress prior to the COVID-19 pandemic. As the rent had been waived on the home whilst the re-tenanting progressed, this immediately improves the contractual rent attributable to the property whilst also contributing 0.1% to the increase in portfolio value over the quarter.

Debt facilities and swap arrangements

As at 31 December 2021, the Group's total borrowings were £223 million, giving a net LTV of 20.7% (total gross debt less cash, as a proportion of gross property value). This followed the major portfolio acquisition and new £100 million long-term loan facilities put in place during the quarter, along with the prudent partial repayment of revolving credit facilities as the Group continues to progress further acquisition opportunities. The Group's weighted average cost on its drawn debt, inclusive of amortisation of arrangement costs, was 3.09% (30 September 2021: 3.16%). The weighted average term to expiry was 7.4 years (30 September 2021: 4.6 years).

The Group has £180 million of fixed term debt facilities and £140 million of revolving credit facilities, with a diversified mix of maturities and lenders. As at 31 December 2021, the Group had drawn £180 million of fixed term debt, with interest costs fixed, and £43 million under the revolving credit facilities which carry a variable interest rate linked to SONIA.

Dividends in the period

The Group paid its first interim dividend for the year ending 30 June 2022, in respect of the period from 1 July 2021 to 30 September 2021, of 1.69 pence per share, on 26 November 2021 to shareholders on the register on 12 November 2021. This distribution was comprised wholly of a property income distribution (PID).

Dividend cover

The Company remains confident of achieving a covered dividend when fully invested at an appropriate gearing level. The Company's level of dividend cover has been depressed following September 2021's equity issuance and in advance of the completion of the significant portfolio acquisition just prior to the period end which, along with other transactions and portfolio initiatives, has now seen contractual rent increase by 23.6%. This is anticipated to progress further as the Group completes its existing development assets and invests remaining investible capital of £82 million to allocated pipeline opportunities at a yield in excess of the interest cost on the Group's remaining debt facilities.

The recent progress made in improving the quality of the Group's debt facilities is fundamental to the Group's approach. The significant increase in long-term fixed rate borrowings frees-up the Group's more flexible facilities to finance acquisition opportunities. This, when coupled with the increase in the overall debt capacity, allows the Group to exceed the stated medium term level of borrowings of approximately 25 per cent of assets at the time of drawdown, thereby financing a volume of acquisitions more efficiently than equity over the short to medium term.

The other significant driver of dividend cover is the Group's level of net rental income. Whilst the residual effects of the COVID-19 pandemic may result in short term fluctuations in net rental income due to asset management or credit loss provisioning, the Group remains confident in the quality of the underlying real estate. All else being equal, the completion of the recent investment activity significantly improves the underlying earnings profile of the Company.

Valuation

The property portfolio was externally valued at £870.5 million at 31 December 2021.

Announcement of second interim dividend

The Company today declares its second interim dividend for the year ending 30 June 2022, in respect of the period from 1 October 2021 to 31 December 2021, of 1.69 pence per share as detailed in the schedule below:

Interim Property Income Distribution (PID): 1.69 pence per share

The dividend reflects an annualised payment of 6.76 pence per share and a dividend yield of 5.9% based on the 26 January 2022 closing share price of 114.6 pence.

The Company had 620,237,346 ordinary shares in issue at 31 December 2021 and has not issued or bought back any shares since that date.

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

LEI: 213800RXPY9WULUSBC04

ENDS

Enquiries:

Kenneth MacKenzie; Gordon Bland

Target Fund Managers Limited

01786 845 912

Mark Young; Mark Bloomfield

Stifel Nicolaus Europe Limited

020 7710 7600

Dido Laurimore; Claire Turvey; Richard Gotla

FTI Consulting

020 3727 1000

TargetHealthcare@fticonsulting.com 

Notes to editors:

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

The Group's portfolio at 31 December 2021 comprised 98 assets let to 31 tenants with a total value of £870.5 million.

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

Important information

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the UK version of the Market Abuse Regulations (EU) No. 596/2014, which is part of UK law by virtue of the European Union (Withdrawal) Act 2018, as amended. Upon the publication of this announcement via Regulatory Information Service, this inside information is now considered to be in the public domain.APPENDIX

1. Analysis of movement in EPRA NTA

The following table provides an analysis of the movement in the unaudited EPRA NTA per share for the period from 1 October 2021 to 31 December 2021:

The EPRA Best Practices Recommendations Guidelines state that companies should publish a set of three NAV metrics. The full set of EPRA NAV metrics are published in the Group's Annual Report. The Company intends to continue to announce the EPRA NTA on a quarterly basis.

At 31 December 2021, due to the valuation ascribed to the Group's interest rate derivative contract used to hedge its exposure to variable interest rates, which is excluded from the calculation of the EPRA NTA, the NAV calculated under International Financial Reporting Standards was 110.9 pence per share.

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

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

The next quarterly valuation of the property portfolio will be conducted by Colliers International Healthcare Property Consultants Limited during April 2022 and the unaudited EPRA NTA per share as at 31 March 2022 is expected to be announced in April 2022.

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

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