Target Healthcare REIT Plc Annual Report 2016

FY2016 Annual Report · Target Healthcare REIT Plc

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Delivering our
strategy

Annual Report and
Financial Statements 2016

Target Healthcare REIT is the
only listed specialist investor in
UK care homes. We bring much
needed investment into the
elderly care sector through our
focus on best-in-class care home
assets, let to tenants who share
our strong care ethos.

Strategic Report
01-15
Performance Highlights

At a glance

Chairman’s Statement

UK Healthcare Investment

Business Model

Strategic Objectives

Strategy in Action

Risks

Financial Statements
16-36
Consolidated Statement
of Comprehensive Income

Consolidated Statement
of Financial Position

Consolidated Statement
of Changes in Equity

Consolidated Statement
of Cash Flows

Notes to the Consolidated
Financial Statements

Corporate Governance
37-61
Board of Directors

Investment Manager

Directors’ Report

Statement of Directors’ Responsibilities

Corporate Governance Statement

Report of the Audit Committee

Directors’ Remuneration Report

Independent Auditor’s Report

Glossary of Terms and Definitions

READ MORE ON PAGE 11 >>

The Group continues to diversify its tenant
base, having added five new tenants to
the portfolio. Our conviction in the quality
of the existing tenant base has led to our
leasing two new homes to existing tenants

and an agreement for a current tenant to enter
a lease once a development is complete.

The geographical spread of the portfolio
continues to evolve, extending to the South
West of England with the purchase of
Summerfield Nursing Home, Cheltenham.
Additionally, two of the properties acquired
are leased to tenants on a base rent plus
a variable top-up rent. The total number
of beds within the portfolio has risen to
2,506 (2015: 1,846). All the bedrooms are
single occupancy with en-suite facilities
including wet room* showers and are
housed in modern, purpose-built homes.

The Group seeks to add both new tenants and
new geographies as the portfolio increases,
further diversifying the risk profile of the portfolio.

Asset valuation growth
The property portfolio was externally
valued at 30 June 2016 at a market value
of £210.7 million, as defined by the Royal
Institution of Chartered Surveyors by Colliers
International Property Consultants Limited.
This is an increase of 47 per cent during
the year, achieved through revaluations
and acquisitions. Revaluations contributed
£6.7 million (10 per cent of the total increase)
despite the impact of the increase
in SDLT in the March 2016 budget with
acquisitions accounting for the remaining
£60.2 million increase.

The majority of properties within the portfolio
have performed well in the year. One home,
on a EBITDA lease, saw a reduction in variable
top-up rent payable resulting in a decrease
in valuation. The home remains profitable and
the Investment Manager is actively reviewing
strategies with the home’s tenant to improve
performance and align the future EBITDA
top-up rent with the original investment
case expectations.

Subsequent to the year end, three further care
homes have been acquired for £20.5 million
including costs.

PORTFOLIO VALUATION (£M)

6.8

210.7

60.2

143.7

s
n
o
i
t
i
d
d
A

s
n
o
i
t
a
u
a
v
e
R

30 June
2015

30 June
2016

* 60 beds in the portfolio do not currently have wet-room showers. It is intended to upgrade these in due course.

NEW TENANTS

NO. OF PROPERTIES

RENT ROLL

VALUE

£15.5m

£210.7m

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Strategic ReportNew properties

Existing properties

FOR MORE INFORMATION PLEASE VISIT
targethealthcarereit.co.uk

SCOTLAND

NORTHERN
IRELAND

NORTH
EAST

NORTH
WEST

YORKSHIRE
AND HUMBER

EAST
MIDLANDS

WEST
MIDLANDS

EAST OF
ENGLAND

SOUTH EAST

SOUTH WEST

Northern Ireland
No. of properties

Rent roll (£m)

Value (£m)

£1.5

£20.6

North West
No. of properties

Rent roll (£m)

Value (£m)

£2.9

£39.3

West Midlands
No. of properties

Rent roll (£m)

Value (£m)

£1.0

£12.9

South West
No. of properties

Rent roll (£m)

Value (£m)

£0.6

£7.5

Scotland
No. of properties

Rent roll (£m)

Value (£m)

North East

No. of properties

Rent roll (£m)

Value (£m)

Yorkshire
and Humber
No. of properties

Rent roll (£m)

Value (£m)

East Midlands
No. of properties

Rent roll (£m)

Value (£m)

£1.6

£23.0

£0.9

£12.1

£2.8

£37.5

£1.9

£25.7

East of England
No. of properties

Rent roll (£m)

Value (£m)

£0.7

£10.0

South East
No. of properties

Rent roll (£m)

Value (£m)

£1.6

£22.1

RENT BY REGION

NUMBER OF PROPERTIES

VALUATION BY REGION

3.7%

4.8%

5.7%

6.2%

9.9%

10.2%

18.8%

17.9%

BY REGION

2.7%

5.4%

21.6%

5.4%

10.8%

18.9%

3.6%

4.8%

5.7%

6.1%

9.8%

10.5%

18.6%

17.8%

10.5%

12.4%

10.8%

13.5%

10.9%

12.2%

North West
Yorkshire and Humber
East Midlands
South East
Scotland
Northern Ireland
West Midlands
North East
Eastern
South West

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic ReportRisks

Strategic objectives

Risk and impact

Change to
risk rating

Factors affecting risk rating

Ongoing mitigation

Dividend

– The Group has no employees and relies on third parties such
as the Investment Manager to effectively manage operations.
Poor performance by providers may result in reduced return
to shareholders.

– A breach of REIT regulations in relation to payment of dividends
may result in loss of tax advantages derived from the Group’s
REIT status.

Total
returns

– Property valuations are inherently subjective and can fluctuate
dependent on market conditions and assumptions. Falls in
property valuations could adversely affect the Group’s borrowing
capacity which is linked to the value of its properties.

Funding

– Without access to equity capital (or further debt) the Group
may be unable to grow through acquisition of attractive
investment opportunities, and may be unable to meet future
financial commitments. This is likely to be driven by investor
demand which will reflect Group performance, competitor
performance and the relative attractiveness of investment
in UK healthcare property.

– Interest rate fluctuations could increase the Group’s costs and

increase the likelihood of non-compliance with lender covenants.

Long-term
secure rental
income

Grow
portfolio

– Changes in government policies, including specific policies
affecting local-authority funding of elderly care, may render
the Group’s strategy inappropriate. Secure income will be at
risk if tenant finances suffer from policy changes, and property
valuations would be impacted in the case of a demand downturn.
– Concentration risk, Significant exposure to a single tenant group
or geographical area could adversely affect Group performance
in certain circumstances.

– Lack of attractive investment opportunities and/or an inability

to invest on acceptable terms in suitable timeframes will hamper
the Group’s growth prospects.

General

– People. Recruitment and retention of Board members and
key personnel at the Investment Manager with relevant and
appropriate skills and experience is vital to the Group’s ability
to meet its objectives. Failure to do so could result in the Group
failing to meet its objectives.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

– The pace of deployment of capital has dragged on investment

– All key service providers, including the Investment Manager,

returns in the period as the Investment Manager has encountered

are subject to performance assessment at least annually.

a number of transactions which have taken longer than average

– The Board monitors the Group’s pace of deployment of capital

to progress through the diligence process to completion. There

via regular reporting by the Investment Manager of: status

is no change to the risk rating as the associated complexities are

of diligence on agreed deals; progress on conversion on

assessed to be deal specific. The Investment Manager retains

pipeline assets to agreed deals; and, details of pipeline assets.

a robust and comprehensive investment appraisal and diligence

– The Group’s activities are monitored to ensure all conditions

process, and has a pipeline of identified assets in excess of

are adhered to. The REIT rules are considered during

available capital in which to place shareholder funds.

investment appraisal and transactions structured to ensure

– The Group’s costs have been managed effectively, demonstrated

conditions are met.

by a decrease in the Ongoing Charges Figure to 1.42 per cent for

the year.

– The Group remains fully compliant with the REIT regulations.

– The Group’s portfolio has increased on a like-for-like basis by

– Loan covenants are closely monitored for compliance, with

5.3 per cent.

awaiting investment.

– LTV has decreased to 10 per cent while the Group has capital

– All investments are subject to a detailed investment appraisal

– Debt facility covenants have been complied with during the year,

– The finished portfolio is 100 per cent let with sustainable rental

with adequate headroom at year-end.

levels and upwards-only annual rental reviews which support

headroom projected.

and approval process prior to acquisition.

asset values.

– The Group has successfully increased its levels of equity, by

– The Group maintains regular communication with investors,

£115.1 million, and its debt availability, by £15 million, during the year.

and, with the assistance of its broker and sponsor, regularly

– Political and economic uncertainty exists in relation to the UK’s

monitors the Group’s capital requirements and investment

decision late in the year to leave the EU. Whilst initial market

pipeline alongside opportunities to raise equity.

volatility has eased, the Group’s ability to access the capital

– Liquidity available from income, equity and debt is kept under

markets to meet its strategic objectives could be impacted

constant review to ensure the Group can meet any forward

in the longer-term.

commitments as they fall due.

– The Group has reduced its borrowing margin, extended access

to its facilities until 1 September 2021, and fixed interest costs

on £21 million of its debt until September 2021.

– The care sector continues to face challenges: The National Living

– Government policy is monitored by the Group so as to

Wage has increased costs, these not universally matched by

increase ability to anticipate changes.

fee increases from Local Authorities; nursing shortages; and,

– Tenants typically have a multiplicity of income sources,

the ongoing difficulty of more engaged regulators.

thereby not being totally dependent on government pay.

– Tenant concentration has reduced as portfolio diversification

– The Group’s properties are let on long-term leases at

increases. Single largest tenant exposure is 22 per cent.

sustainable rent levels, providing security of income.

– Activity levels in the market remain competitive, particularly for the

– The Investment Manager develops and maintains a network

most desirable assets in the South East of England. The Group

of relationships with property owners and developers which

continues to see opportunities which meet its criteria, as identified

it is expected will provide the Group with the best possible

by the Investment Manager, and is actively pursuing these.

opportunity to acquire suitable properties.

– Demographics are such that many new homes require

to be built to satisfy demand. The Group is well-positioned

to participate in acquiring a share of these.

– The Investment Manager has bolstered its team, with additions

– Directors are subject to annual performance assessment,

of investment and healthcare professionals as well as a dedicated

and are subject to re-election by shareholders.

portfolio management team.

– The Investment Manager is subject to regular performance

appraisal; has its remuneration aligned with group performance;

and, there is a key man provision within the investment

management agreement between the manager and the Group.

Strategic Report

Strategic objectives

Risk and impact

Change to

risk rating

Factors affecting risk rating

Ongoing mitigation

FOR VIABILITY STATEMENT
GO TO PAGE 41 >>

Dividend

– The Group has no employees and relies on third parties such

as the Investment Manager to effectively manage operations.

Poor performance by providers may result in reduced return

– A breach of REIT regulations in relation to payment of dividends

may result in loss of tax advantages derived from the Group’s

to shareholders.

REIT status.

Total

returns

– Property valuations are inherently subjective and can fluctuate

dependent on market conditions and assumptions. Falls in

property valuations could adversely affect the Group’s borrowing

capacity which is linked to the value of its properties.

Funding

– Without access to equity capital (or further debt) the Group

may be unable to grow through acquisition of attractive

investment opportunities, and may be unable to meet future

financial commitments. This is likely to be driven by investor

demand which will reflect Group performance, competitor

performance and the relative attractiveness of investment

in UK healthcare property.

– Interest rate fluctuations could increase the Group’s costs and

increase the likelihood of non-compliance with lender covenants.

Long-term

secure rental

income

Grow

portfolio

– Changes in government policies, including specific policies

affecting local-authority funding of elderly care, may render

the Group’s strategy inappropriate. Secure income will be at

risk if tenant finances suffer from policy changes, and property

valuations would be impacted in the case of a demand downturn.

– Concentration risk, Significant exposure to a single tenant group

or geographical area could adversely affect Group performance

in certain circumstances.

– Lack of attractive investment opportunities and/or an inability

to invest on acceptable terms in suitable timeframes will hamper

the Group’s growth prospects.

General

– People. Recruitment and retention of Board members and

key personnel at the Investment Manager with relevant and

appropriate skills and experience is vital to the Group’s ability

to meet its objectives. Failure to do so could result in the Group

failing to meet its objectives.

– The pace of deployment of capital has dragged on investment

returns in the period as the Investment Manager has encountered
a number of transactions which have taken longer than average
to progress through the diligence process to completion. There
is no change to the risk rating as the associated complexities are
assessed to be deal specific. The Investment Manager retains
a robust and comprehensive investment appraisal and diligence
process, and has a pipeline of identified assets in excess of
available capital in which to place shareholder funds.

– The Group’s costs have been managed effectively, demonstrated
by a decrease in the Ongoing Charges Figure to 1.42 per cent for
the year.

– The Group remains fully compliant with the REIT regulations.

– All key service providers, including the Investment Manager,
are subject to performance assessment at least annually.
– The Board monitors the Group’s pace of deployment of capital
via regular reporting by the Investment Manager of: status
of diligence on agreed deals; progress on conversion on
pipeline assets to agreed deals; and, details of pipeline assets.
– The Group’s activities are monitored to ensure all conditions

are adhered to. The REIT rules are considered during
investment appraisal and transactions structured to ensure
conditions are met.

– The Group’s portfolio has increased on a like-for-like basis by

– Loan covenants are closely monitored for compliance, with

5.3 per cent.

headroom projected.

– LTV has decreased to 10 per cent while the Group has capital

– All investments are subject to a detailed investment appraisal

awaiting investment.

– Debt facility covenants have been complied with during the year,

with adequate headroom at year-end.

and approval process prior to acquisition.

– The finished portfolio is 100 per cent let with sustainable rental
levels and upwards-only annual rental reviews which support
asset values.

– The Group has successfully increased its levels of equity, by

£115.1 million, and its debt availability, by £15 million, during the year.

– Political and economic uncertainty exists in relation to the UK’s
decision late in the year to leave the EU. Whilst initial market
volatility has eased, the Group’s ability to access the capital
markets to meet its strategic objectives could be impacted
in the longer-term.

– The Group has reduced its borrowing margin, extended access
to its facilities until 1 September 2021, and fixed interest costs
on £21 million of its debt until September 2021.

– The Group maintains regular communication with investors,
and, with the assistance of its broker and sponsor, regularly
monitors the Group’s capital requirements and investment
pipeline alongside opportunities to raise equity.

– Liquidity available from income, equity and debt is kept under
constant review to ensure the Group can meet any forward
commitments as they fall due.

– The care sector continues to face challenges: The National Living
Wage has increased costs, these not universally matched by
fee increases from Local Authorities; nursing shortages; and,
the ongoing difficulty of more engaged regulators.

– Tenant concentration has reduced as portfolio diversification
increases. Single largest tenant exposure is 22 per cent.

– Government policy is monitored by the Group so as to

increase ability to anticipate changes.

– Tenants typically have a multiplicity of income sources,
thereby not being totally dependent on government pay.

– The Group’s properties are let on long-term leases at
sustainable rent levels, providing security of income.

– Activity levels in the market remain competitive, particularly for the
most desirable assets in the South East of England. The Group
continues to see opportunities which meet its criteria, as identified
by the Investment Manager, and is actively pursuing these.

– The Investment Manager develops and maintains a network
of relationships with property owners and developers which
it is expected will provide the Group with the best possible
opportunity to acquire suitable properties.

– Demographics are such that many new homes require

to be built to satisfy demand. The Group is well-positioned
to participate in acquiring a share of these.

– The Investment Manager has bolstered its team, with additions

– Directors are subject to annual performance assessment,

of investment and healthcare professionals as well as a dedicated
portfolio management team.

and are subject to re-election by shareholders.

– The Investment Manager is subject to regular performance

appraisal; has its remuneration aligned with group performance;
and, there is a key man provision within the investment
management agreement between the manager and the Group.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic Report

Consolidated Statement of Comprehensive Income
For the year ended 30 June 2016

Revenue

Rental income
Other income

Total revenue

Year ended 30 June 2016

Year ended 30 June 2015

Notes

Revenue
£’000

Capital
£’000

Total
£’000

Revenue
£’000

Capital
£’000

Total
£’000

12,677
61

12,738

4,136
–

4,136

16,813
61

16,874

9,898
66

9,964

3,760
–

3,760

13,658
66

13,724

Gains/(losses) on revaluation of investment properties
Cost of corporate acquisitions

–
–

425
(998)

–
–

(839)
(174)

Total income

Expenditure

Investment management fee
– base fee
– performance fee
VAT refund on management fees
Other expenses

Total expenditure

Profit before finance costs and taxation

Net finance costs

Interest receivable
Interest payable and similar charges

Profit before taxation
Taxation

Profit for the year
Other comprehensive income:
Items that are or may be reclassified subsequently

to profit or loss

Movement in valuation of interest rate swap

Total comprehensive income for the year

Earnings per share (pence)

12,738

3,563

16,301

9,964

2,747

12,711

(1,783)
(871)
–
(992)

(3,646)

–
–
–
–

–

(1,783)
(871)
–
(992)

(1,140)
(466)
82
(880)

(3,646)

(2,404)

–
–
–
–

–

(1,140)
(466)
82
(880)

(2,404)

9,092

3,563

12,655

7,560

2,747

10,307

173
(1,102)

8,163
(24)

8,139

–
–

3,563
–

3,563

173
(1,102)

11,726
(24)

11,702

–

(316)

8,139

4.74

3,247

11,386

2.07

6.81

99
(815)

6,844
(39)

6,805

–

6,805

5.71

–
–

2,747
–

2,747

–

2,747

2.31

99
(815)

9,591
(39)

9,552

–

9,552

8.02

The total column of this statement represents the Group’s Consolidated Statement of Comprehensive Income, prepared in accordance
with IFRS. The supplementary revenue return and capital return columns are both prepared under guidance published by the Association
of Investment Companies.

All revenue and capital items in the above statement are derived from continuing operations.

No operations were discontinued in the year.

The accompanying notes are an integral part of these financial statements.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Financial StatementsConsolidated Statement of Financial Position
As at 30 June 2016

Non-current assets
Investment properties
Trade and other receivables

Current assets
Trade and other receivables
Cash and cash equivalents

Total assets

Non-current liabilities
Bank loan
Interest rate swap
Trade and other payables

Current liabilities
Trade and other payables

Total liabilities

Net assets

Stated capital and reserves
Stated capital account
Hedging reserve
Capital reserve
Revenue reserve

Equity shareholders’ funds

As at
30 June
2016
£’000

As at
30 June
2015
£’000

Notes

200,720
3,742

204,462

13,222
65,107

138,164
2,530

140,694

6,457
29,159

282,791

176,310

(20,449)
(316)
(3,742)

(24,507)

(5,002)

(29,509)

(30,865)
–
(2,530)

(33,395)

(3,623)

(37,018)

253,282

139,292

246,533
(316)
4,698
2,367

253,282

136,846
–
495
1,951

139,292

Net asset value per ordinary share (pence)

100.4

97.9

The financial statements on pages 16 to 36 were approved by the Board of Directors and authorised for issue on 28 September 2016 and were
signed on its behalf by:

Mr Malcolm Naish
Chairman

The accompanying notes are an integral part of these financial statements.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic ReportConsolidated Statement of Changes in Equity
For the year ended 30 June 2016

At 30 June 2015

Notes

Stated capital
account
£’000

136,846

Hedging
reserve
£’000

Capital
reserve
£’000

Revenue
reserve
£’000

Total
£’000

–

495

1,951

139,292

Total comprehensive income for the year:

–

(316)

3,563

8,139

11,386

Transactions with owners recognised in equity:
Dividends paid
Issue of ordinary shares
Buyback of ordinary shares into treasury
Resale of ordinary shares from treasury
Expenses of issue

At 30 June 2016

For the year ended 30 June 2015

(1,973)
114,438
–
–
(2,778)

–
–
–
–
–

–
–
(14,159)
14,799
–

(7,723)
–
–
–
–

(9,696)
114,438
(14,159)
14,799
(2,778)

246,533

(316)

4,698

2,367

253,282

At 30 June 2014

Stated capital
account
£’000

Notes

Capital
reserve
£’000

Revenue
reserve
£’000

Total
£’000

91,516

(2,252)

954

90,218

Total comprehensive income for the year:

–

2,747

6,805

9,552

Transactions with owners recognised in equity:
Dividends paid
Issue of ordinary shares
Expenses of issue

At 30 June 2015

The accompanying notes are an integral part of these financial statements.

(1,313)
47,802
(1,159)

–
–
–

(5,808)
–
–

(7,121)
47,802
(1,159)

136,846

495

1,951

139,292

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Financial Statements
Consolidated Statement of Cash Flows
For the year ended 30 June 2016

Cash flows from operating activities

Profit before tax
Adjustments for:
Interest receivable
Interest payable
Revaluation gains on property portfolio
Increase in trade and other receivables
Increase in trade and other payables

Interest paid
Interest received
Tax paid

Year ended
30 June
2016
£’000

Year ended
30 June
2015
£’000

Notes

11,726

9,591

(173)
1,102
(4,787)
(233)
1,271

8,906

(854)
173
(164)

(845)

(99)
815
(2,921)
(308)
1,003

8,081

(613)
99
(47)

(561)

Net cash inflow from operating activities

8,061

7,520

Cash flows from investing activities

Purchase of investment properties
Acquisition of subsidiaries

Net cash outflow from investing activities

Cash flows from financing activities

Issue of ordinary share capital
Expenses of issue paid
Resale of ordinary shares from treasury
(Repayment)/drawdown of bank loan facility
(Grant)/repayment of development loan
Dividends paid

Net cash inflow from financing activities

Net increase in cash and cash equivalents
Opening cash and cash equivalents

Closing cash and cash equivalents

Transactions which do not require the use of cash
Movement in fixed or guaranteed rent reviews and lease incentives
Issue of ordinary share capital
Buyback of ordinary shares into treasury

The accompanying notes are an integral part of these financial statements.

(34,833)
(27,091)

(61,924)

100,279
(2,778)
14,799
(10,638)
(2,170)
(9,681)

89,811

35,948
29,159

65,107

4,362
14,159
(14,159)

(51,736)
(5,845)

(57,581)

47,802
(1,158)
–
19,225
3,300
(7,074)

62,095

12,034
17,125

29,159

3,760
–
–

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic ReportNotes to the Consolidated Financial Statements

1. Accounting policies
(a) Basis of preparation
A summary of the principal accounting policies, all of which have been applied consistently throughout the year, is set out below.

Basis of accounting
These consolidated financial statements have been prepared and approved in accordance with International Financial Reporting Standards (‘IFRS’) as
adopted by the EU, interpretations issued by the International Financial Reporting Standards Committee, applicable legal and regulatory requirements
of the Companies (Jersey) Law 1991 (as amended), and the Listing Rules of the UK Listing Authority.

Where presentational guidance set out in the Statement of Recommended Practice (‘SORP’) for investment trust companies issued by the Association
of Investment Companies (‘AIC’) in November 2014 is consistent with the requirements of IFRS, the Directors have sought to prepare the financial
statements on a basis compliant with the recommendations of the SORP.

The notes and financial statements are presented in pounds sterling (being the functional currency and presentational currency for the Company)
and are rounded to the nearest thousand except where otherwise indicated.

Significant estimates and judgements
The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported for assets
and liabilities as at the balance sheet date and the amounts reported for revenue and expenses during the period. The nature of the estimation
means that actual outcomes could differ from those estimates. Estimates and underlying assumptions are reviewed on an on-going basis.
Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Significant
estimates and assumptions are made in the valuation of the investment properties held. Further information on market risk and sensitivity to
market changes is provided in the notes.

Applicable standards and interpretations
The accounting policies adopted are consistent with those of the previous financial year, except that the following new standards have become
effective in the current year:

– IFRS 3 ‘Business Combinations’

The amendment is applied prospectively and clarifies that all contingent consideration arrangements classified as liabilities (or assets) arising
from a business combination should be subsequently measured at fair value through profit or loss whether or not they fall within the scope
of IAS 39.

– IAS 24 ‘Related Party Disclosures’

The amendment is applied retrospectively and clarifies that a management entity (an entity that provides key management personnel services) is
a related party subject to the related party disclosures. In addition, an entity that uses a management entity is required to disclose the expenses
incurred for management services.

– IAS 40 ‘Investment Property’

The description of ancillary services in IAS 40 differentiates between investment property and owner-occupied property (i.e. property, plant and
equipment). The amendment is applied prospectively and clarifies that IFRS 3, and not the description of ancillary services in IAS 40, is used to
determine if the transaction is the purchase of an asset or business combination.

Standards issued but not yet effective
The following standards have been issued but are not effective for this accounting year and have not been adopted early:

– IFRS 9 ‘Financial Instruments’

In July 2014, the IASB published the final version of IFRS 9 ‘Financial Instruments’ which replaces the existing guidance in IAS 39 ‘Financial
Instruments: Recognition and Measurement’.

The IFRS 9 requirements represent a change from the existing requirements in IAS 39 in respect of financial assets. The standard contains two
primary measurement categories for financial assets: amortised cost and fair value. A financial asset would be measured at amortised cost if it is
held within a business model whose objective is to hold assets in order to collect contractual cash flows, and the asset’s contractual terms give
rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. All other financial assets would
be measured at fair value. The standard eliminates the existing IAS 39 categories of held-to-maturity, available-for-sale and loans and receivables.

For financial liabilities, IFRS 9 largely carries forward without substantive amendment the guidance on classification and measurement from
IAS 39. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an
entity’s own credit risk is recorded in other comprehensive income rather than in profit or loss.

The standard introduces new requirements for hedge accounting that align hedge accounting more closely with risk management and
establishes a more principles-based approach to hedge accounting. The standard also adds new requirements to address the impairment
of financial assets and means that a loss event will no longer need to occur before an impairment allowance is recognised.

The standard will be effective for annual periods beginning on or after 1 January 2018, and is required to be applied retrospectively with some
exemptions. The Group is yet to assess IFRS 9’s full impact but it is not currently anticipated that this standard will have any material impact
on the Group’s financial statements as presented for the current year.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Financial Statements

– IFRS 16 ‘ Leases’

In January 2016, the IASB published the final version of IFRS 16 ‘Leases’. IFRS 16 specifies how an IFRS reporter will recognise, measure,
present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for
all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating
or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17.

IFRS 16 applies to annual reporting periods beginning on or after 1 January 2019. The Group is yet to assess IFRS 16’s full impact but it is not
currently anticipated that this standard will have any material impact on the Group’s financial statements as presented for the current year.

The Group does not consider that the future adoption of any new standards, in the form currently available, will have any material impact on the
financial statements as presented except for changes to disclosures.

Going concern
In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council.

After making enquiries, and bearing in mind the nature of the Group’s business and assets, the Directors consider that the Group has adequate
resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing
the financial statements.

(b) Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and all of its subsidiaries drawn up to 30 June 2016.
Subsidiaries are those entities, including special purpose entities, controlled by the Company and are detailed in note 11. Control exists when the
Company is exposed, or has rights, to variable returns from its investment with the investee and has the ability to affect those returns through its
power over the investee. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements
of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

In preparing the consolidated financial statements, intra group balances, transactions and unrealised gains or losses have been eliminated in full.
Uniform accounting policies are adopted for all companies within the Group.

(c) Revenue recognition
Rental Income
Rental income arising on investment properties is accounted for in the Statement of Comprehensive Income on a straight line basis over the lease
term as adjusted for the following:

– Any rental income from fixed and minimum guaranteed rent review uplifts is recognised on a straight line basis over the shorter of the term to

lease expiry or to the first tenant break option;

– Lease incentives are spread evenly over the lease term, even if payments are not made on such a basis. The lease term is the non-cancellable
period of the lease together with any further term for which the tenant has the option to continue the lease, where, at the inception of the lease,
the Directors are reasonably certain that the tenant will exercise that option; and

– Contingent rents are recognised in the period in which they are earned.

Where income is recognised in advance of the related cash flows due to fixed and minimum guaranteed rent review uplifts or lease incentives,
an adjustment is made to ensure that the carrying value of the relevant property including the accrued rent relating to such uplifts or lease
incentives does not exceed the external valuation.

Any rental income arising in the period due to the recognition of fixed and minimum guaranteed rent review uplifts on a straight line basis is
charged to the capital column of the Statement of Comprehensive Income.

Interest Receivable
Interest receivable is accounted for on an accruals basis.

Service charges and expenses recoverable from tenants
Income arising from expenses recharged to tenants is recognised in the period in which the compensation becomes receivable. Service charges
and other such receipts are included gross of the related costs, as the Directors consider the Group acts as principal in this respect.

(d) Expenses
Expenses are accounted for on an accruals basis and are inclusive of VAT. The Group’s investment management and administration fees, finance
costs and all other expenses are charged through the Statement of Comprehensive Income and are charged to revenue.

Performance fees are charged through the Statement of Comprehensive Income and are charged to revenue. The annual performance fee is
based on 10 per cent of the amount by which the total return of the Group’s portfolio is in excess of the total return of the MSCI Healthcare Index.
The performance fee is measured over a rolling three year period, commencing from the acquisition of the first property.

(e) Dividends
Dividends are accounted for in the period in which they are paid.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic Report
1. Accounting policies continued
(f) Taxation
Taxation on the profit or loss for the period not exempt under UK-REIT regulations comprises current and deferred tax. Taxation is recognised
in the Statement of Comprehensive Income except to the extent that it relates to items recognised as direct movements in equity, in which case
it is also recognised as a direct movement in equity.

Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the balance
sheet date.

Deferred income tax is provided using the liability method on all temporary differences at the reporting date between the tax bases of assets
and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets are recognised only to the extent that it
is probable that taxable profit will be available against which deductible temporary differences, carried forward tax credits or tax losses can be
utilised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and
liabilities. In determining the expected manner of realisation of an asset the Directors consider that the Group will recover the value of investment
property through sale. Deferred income tax relating to items recognised directly in equity is recognised in equity and not in profit or loss.

Entry to UK-REIT Regime
The Company’s conversion to UK-REIT status was effective from 1 June 2013. With effect from 11 April 2014, the Company withdrew from the
single company REIT regime and entered into the Group REIT regime.

Entry to the regime results in, subject to continuing relevant UK-REIT criteria being met, the profits of the Company’s property rental business
comprising both income and capital gains, being exempt from UK taxation.

Target Healthcare REIT (Mossvale) Limited joined the Group REIT regime with effect from 12 April 2014. THR Number One PLC and THR Number
Two Limited entered the Group REIT regime when they both commenced trading on 17 June 2014. THR Number 3 Limited entered the Group
REIT regime on 29 July 2014 when acquired by the Company.

THR Number 4 Limited, THR Number 5 Limited and THR Number 6 Limited entered the Group REIT regime on 6 October 2015, 3 February 2016
and 23 June 2016 respectively, being the dates that each was acquired by the Company during the year.

The Group ensures that it complies with the UK-REIT regulations through monitoring the on-going conditions required to maintain REIT status.

(g) Property acquisitions
Where property is acquired, via corporate acquisitions or otherwise, management considers the substance of the assets and activities of the
acquired entity in determining whether the acquisition represents the acquisition of a business or the acquisition of an asset.

Where such acquisitions are not judged to be an acquisition of a business, they are not treated as business combinations associated with
the investment property which are charged through the statement of comprehensive income in the period of the acquisition. Rather, the cost
to acquire the corporate entity is allocated between the identifiable assets and liabilities of the entity based on their relative fair values at the
acquisition date. Accordingly, no goodwill or additional deferred taxation arises. Otherwise, acquisitions are accounted for as business
combinations. Acquisition related costs are written off as incurred.

(h) Investment properties
Investment properties consist of land and buildings (principally care homes) which are not occupied for use by, or in the operations of, the Group,
nor for sale in the ordinary course of business, but are held to earn rental income together with the potential for capital and income growth.

Investment properties are initially recognised at cost, being the fair value of consideration given, including transaction costs associated with the
investment property. Any subsequent capital expenditure incurred in improving investment properties is capitalised in the period incurred and
included within the book cost of the property. Acquisition related costs are written off in the period in which they are incurred.

For properties subject to deferred consideration clauses within their purchase agreements if certain performance measures are met, the deferred
consideration is recognised in the period in which it falls due and payable or, if later, the date on which the related uplift in the property valuation
is recognised.

After initial recognition, investment properties are measured at fair value, with gains and losses recognised in the Statement of Comprehensive
Income. Fair value is based on the open market valuation, as provided by Colliers International Property Consultants Limited, Chartered Surveyors,
at the balance sheet date using recognised valuation techniques, appropriately adjusted for unamortised lease incentives, lease surrender premiums
and rental adjustments.

The determination of the fair value of investment properties requires the use of estimates such as future cash flows from assets (such as lettings,
tenants’ profiles, future revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall
repair and condition of the property) and discount rates applicable to those assets. These estimates are based on local market conditions existing
at the balance sheet date.

On derecognition, gains and losses on disposals of investment properties are recognised in the Statement of Comprehensive Income and
transferred to the Capital Reserve. Recognition and derecognition occurs on the completion of a sale between a willing buyer and a willing seller.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Financial StatementsNotes to the Consolidated Financial Statements(continued) (i) Business combinations
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration
transferred measured at acquisition date fair value and the amount of any non-controlling interests in the acquiree. For each business combination,
the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable
net assets. Acquisition-related costs are expensed as incurred.

(j) Cash and cash equivalents
Cash and cash equivalents consist of cash in hand and short-term deposits in banks with an original maturity of three months or less.

(k) Rent and other receivables
Rents receivable, which are due to be received in advance at the relevant quarter end, are recognised and carried at the original invoice amount
less an allowance for any uncollectable amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable.
Bad debts are written off when identified.

Other incentives provided to tenants and fixed or guaranteed rental uplifts are recognised as an asset and amortised over the period from the
date of lease commencement to the earliest termination date.

Loans receivable have fixed or determinable payments and are recognised at cost plus any interest accrued.

(l) Interest-bearing bank loans and borrowings
All bank loans and borrowings are initially recognised at cost, being fair value of the consideration received net of arrangement costs associated with
the borrowing. After initial recognition, all interest bearing loans and borrowings are subsequently measured at amortised cost using the effective
interest method. Amortised cost is calculated by taking into account any loan arrangement costs and any discount or premium on settlement.

(m) Derivative financial instruments
The Group uses derivative financial instruments to hedge its risk associated with interest rate fluctuations. The Group’s policy is not to trade
in derivative instruments.

Derivative instruments are initially recognised in the Balance Sheet at their fair value. Fair value is determined by using a model to calculate the
net present value of future market interest rates or by using market values for similar instruments. Transaction costs are expensed immediately.

Gains or losses arising on the fair value of cash flow hedges in the form of derivative instruments are reported through Other Comprehensive
Income and are recognised through the Hedging Reserve. On maturity, or early redemption, the unrealised gains or losses arising from cash
flow hedges in the form of derivative instruments, initially recognised in Other Comprehensive Income, are reclassified to profit or loss.

The Group considers that its interest rate swaps qualify for hedge accounting when the following criteria are satisfied:

– The instruments must be related to an asset or liability;
– They must change the character of the interest rate by converting a variable rate to a fixed rate or vice versa;
– They must match the principal amounts and maturity dates of the hedged items; and
– As cash-flow hedges the forecast transactions (incurring interest payable on the bank loans) that are subject to the hedges must be highly
probable and must present an exposure to variations in cash flows that could ultimately affect the profit or loss. The effectiveness of the
hedges must be capable of reliable measurement and must be assessed as highly effective on an ongoing basis throughout the financial
reporting periods for which the hedges were designated.

(n) Reserves
The Company is able to pay a dividend out of the Stated Capital Account in accordance with the requirements of the Companies (Jersey)
Law 1991 (as amended).

Hedging Reserve
The following are accounted for in the hedging reserve:

– Increases and decreases in the fair value of interest rate swaps held at the period end;

Capital Reserve
The following are accounted for in the capital reserve:

– Gains and losses on the disposal of investment properties;
– Increases and decreases in the fair value of investment properties held at the period end;
– Rent adjustments which represent the effect of spreading uplifts and incentives; and
– The buyback of shares into, and resale of shares from, treasury.

Revenue Reserve
The net profit/(loss) arising in the revenue column of the Statement of Comprehensive Income is added to or deducted from this reserve which,
in addition to the Stated Capital Account, is available for paying dividends.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic Report2. Fees paid to Target Advisers LLP

Base management fee
Performance fee

Total

Year ended
30 June 2016
£’000

Year ended
30 June 2015
£’000

1,783
871

2,654

1,140
466

1,606

The Company’s Investment Manager is Target Advisers LLP (the ‘Investment Manager’ or ‘Target’) and is responsible for the day-to-day management
of the Company. Target has also been appointed as the Company’s Alternative Investment Fund Manager (the ‘AIFM’). The Investment Manager is
entitled to an annual base management fee of 0.90 per cent of the net assets of the Group and an annual performance fee calculated by reference
to 10 per cent of the outperformance of the Group’s portfolio total return relative to the MSCI UK Annual Healthcare Index (‘the Index’). The maximum
amount of total fees payable by the Group to the Investment Manager is limited to 1.25 per cent of the average net assets of the Group over
a financial year.

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

A performance fee in respect of the year to 31 December 2015 totalling £636,000 (period to 31 December 2014: £506,000) has been paid
of which £110,000 (2015: £150,000) was accrued in the prior period accounts. At the year-end an accrual of £345,000 (inclusive of estimated
irrecoverable VAT) has been made based on the Group’s historic portfolio performance relative to the Index.

With effect from 30 September 2016, the Investment Management Agreement can be terminated by either party on 12 months’ written notice
provided that such notice shall not expire earlier than 30 September 2019. Should the Company terminate the Investment Management Agreement
earlier than 30 September 2019 then compensation in lieu of notice will be payable to the Investment Manager. The Investment Management
Agreement may be terminated immediately without compensation if the Investment Manager: is in material breach of the agreement; is guilty
of negligence, wilful default or fraud; is the subject of insolvency proceedings; or there occurs a change of Key Managers to which the Board
has not given its prior consent.

3. Other expenses

Secretarial and administration fee
Valuation and other professional fees
Directors’ fees
Direct property costs
Auditor’s remuneration for:
– statutory audit of the Company
– statutory audit of the subsidiaries
– assurance related services
– other services related to taxation compliance*
– other services relating to tax advisory*
Other taxation compliance and advisory
Listing & Registrar fees
Public relations
Other

Total

Year ended
30 June 2016
£’000

Year ended
30 June 2015
£’000

157
209
115
112

44
44
6
–
–
55
51
22
177

992

147
242
113
–

37
35
5
52
28
–
54
26
141

880

The valuers of the investment properties, Colliers International Property Consultants Limited, have agreed to provide valuation services in respect
of the property portfolio. The valuation agreement states that annual fees will be payable quarterly based on rates of 0.05 per cent of the aggregate
value of the property portfolio up to £30 million, 0.04 per cent up to £60 million and 0.035 per cent greater than £60 million.

* The Company paid a further £41,000 to EY as non-audit fees in relation to expenses of issue of shares during the year and these are included in

note 15. Expenses are inclusive of VAT as the Company is not VAT registered. A split of the services provided by EY and the fees for their services
is provided within the Report of the Audit Committee on page 48.

4. Interest receivable

Deposit interest
Development loan interest

Total

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Year ended
30 June 2016
£’000

Year ended
30 June 2015
£’000

173
–

173

61
38

Financial StatementsNotes to the Consolidated Financial Statements(continued) 5. Interest payable and similar charges

Bank loan

Total

6. Taxation

Current tax

Total tax charge

Year ended
30 June 2016
£’000

Year ended
30 June 2015
£’000

1,102

815

Year ended
30 June 2016
£’000

Year ended
30 June 2015
£’000

A reconciliation of the corporation tax charge applicable to the results at the statutory corporation tax rate to the charge for the year is as follows:

Profit before tax

Tax at 20.0% (2015: 20.76%)
Effects of:
REIT exempt profits
REIT exempt (gains)/losses
Cost of corporate acquisitions
Capital allowances claimed

Total tax charge

Year ended
30 June 2016
£’000

Year ended
30 June 2015
£’000

11,726

2,345

(2,436)
(85)
200
–

9,591

1,991

(2,167)
174
36
5

The Directors intend to conduct the Company’s affairs such that management and control is exercised in the United Kingdom and so that the
Company carries on any trade in the United Kingdom.

Subject to continuing relevant UK-REIT criteria being met, the profits from the Group’s property rental business, arising from both income and
capital gains, are exempt from corporation tax.

7. Dividends
Amounts paid as distributions to equity holders during the year to 30 June 2016.

Fourth interim dividend for the year ended 30 June 2015
First interim dividend for the year ended 30 June 2016
Second interim dividend for the year ended 30 June 2016
Third interim dividend for the year ended 30 June 2016

Total

Amounts paid as distributions to equity holders during the year to 30 June 2015.

Sixth interim dividend for the period ended 30 June 2014
First interim dividend for the year ended 30 June 2015
Second interim dividend for the year ended 30 June 2015
Third interim dividend for the year ended 30 June 2015

Total

Dividend rate
(pence per
share)

Year ended
30 June 2016
£’000

1.530
1.545
1.545
1.545

6.165

2,177
2,199
2,660
2,660

9,696

Dividend rate
(pence per
share)

Year ended
30 June 2015
£’000

1.50
1.53
1.53
1.53

6.09

1,428
1,721
1,795
2,177

7,121

It is the policy of the Directors to declare and pay dividends as interim dividends. The Directors do not therefore recommend a final dividend.
The fourth interim dividend in respect of the year ended 30 June 2016, of 1.545 pence per share, was paid on 26 August 2016 to shareholders
on the register on 12 August 2016 amounting to £3,896,000. It is the intention of the Directors that the Group will continue to pay dividends quarterly.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic Report8. Earnings per share and Net Asset Value per share
EPRA is an industry body which issues best practice reporting guidelines and the Group report an EPRA NAV quarterly. EPRA has issued best
practice recommendations for the calculation of certain figures which are included below.

Earnings per share

Revenue earnings
Capital earnings
Total earnings

Year ended 30 June 2016

Year ended 30 June 2015

£’000

Pence per share

£’000

Pence per share

8,139
3,563
11,702

4.74
2.07
6.81

6,805
2,747
9,552

5.71
2.31
8.02

Average number of shares in issue

171,734,587

119,160,560

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

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

The reconciliations are provided in the table below:

Earnings per IFRS Consolidated Statement of Comprehensive Income
Adjusted for rental income arising from recognising guaranteed rent review uplifts and lease incentives
Adjusted for revaluations of investment properties
Adjusted for cost of corporate acquisitions

EPRA earnings
Adjusted for performance fee

Group specific adjusted EPRA earnings

Earnings per share (‘EPS’) (pence per share)
EPS per IFRS Consolidated Statement of Comprehensive Income
EPRA EPS
Group specific adjusted EPRA EPS

Year ended
30 June 2016

Year ended
30 June 2015

11,702
(4,136)
(425)
998

8,139
871

9,010

6.81
4.74
5.25

9,552
(3,760)
839
174

6,805
466

7,271

8.02
5.71
6.10

Net Asset Value per share
The Group’s Net Asset Value per ordinary share of 100.4 pence (2015: 97.9 pence) is based on equity shareholders’ funds of £253,282,000
(2015: £139,292,000) and on 252,180,851 (2015: 142,298,226) ordinary shares, being the number of shares in issue at the year-end.

The EPRA Net Asset Value (‘EPRA NAV’) per share is arrived at by adjusting the net asset value (‘NAV’) calculated under International Financial
Reporting Standards (‘IFRS’). The EPRA NAV provides a measure of the fair value of a company on a long-term basis. The only adjustment required
to the NAV is that the EPRA NAV excludes the fair value of the Group’s interest rate swap, which was recognised as a liability of £316,000 under
IFRS as at 30 June 2016 (2015: nil).

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

NAV per financial statements (pence per share)
Valuation of interest rate swap

EPRA NAV (pence per share)

As at 30 June
2016

As at 30 June
2015

100.4
0.2

100.6

97.9
–

97.9

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Financial StatementsNotes to the Consolidated Financial Statements(continued) 9. Investments
Freehold and leasehold properties

Opening market value
Opening fixed or guaranteed rent reviews and lease incentives

Opening carrying value

Purchases
Purchase of property through a business combination
Acquisition costs capitalised
Acquisition costs written off
Revaluation movement

Movement in market value
Movement in fixed or guaranteed rent reviews and lease incentives

Movement in carrying value

Closing market value
Closing fixed or guaranteed rent reviews and lease incentives

Closing carrying value

Changes in the valuation of investment properties

Revaluation movement
Acquisition costs written off
Movement in fixed or guaranteed rent reviews and lease incentives

Gains/(losses) on revaluation of investment properties

As at
30 June 2016
£’000

As at
30 June 2015
£’000

143,748
(5,584)

138,164

32,912
27,298
1,921
(1,921)
6,708

66,918
(4,362)

62,556

210,666
(9,946)

200,720

83,246
(1,824)

81,422

49,424
5,845
2,312
(2,312)
5,233

60,502
(3,760)

56,742

143,748
(5,584)

138,164

Year ended
30 June 2016
£’000

Year ended
30 June 2015
£’000

6,708
(1,921)
(4,362)

5,233
(2,312)
(3,760)

425

(839)

The properties were valued at £210,666,000 (2015: £143,748,000) by Colliers International Property Consultants Limited (‘Colliers’), in their capacity
as external valuers. The valuation was undertaken in accordance with the RICS Valuation – Professional Standards, incorporating the International
Valuation Standards January 2014 (‘the Red Book’) issued by the Royal Institution of Chartered Surveyors (‘RICS’) on the basis of Market Value,
supported by reference to market evidence of transaction prices for similar properties. Market Value represents the estimated amount for which
an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper
marketing where the parties had each acted knowledgeably, prudently and without compulsion. The quarterly property valuations are reviewed
by the Board at each Board meeting. The fair value of the properties after adjusting for the movement in the fixed or guaranteed rent reviews and
lease incentives was £200,720,000 (2015: £138,164,000). The adjustment consisted of £9,719,000 relating to fixed or guaranteed rent reviews and
£227,000 of accrued income relating to the recognition of rental income over rent free periods subsequently amortised over the life of the lease,
which are both separately recorded in the accounts as current assets within ‘trade and other receivables’ (see note 10).

All leasehold properties are carried at fair value rather than amortised over the term of the lease. The same valuation criteria are therefore applied
to leasehold as freehold properties. All leasehold properties have more than 990 years remaining on the lease term.

The Group is required to classify fair value measurements of its investment properties using a fair value hierarchy, in accordance with IFRS 13
‘Fair Value Measurement’. This hierarchy reflects the subjectivity of the inputs used, and has the following levels:

– Level 1 – unadjusted quoted prices in active markets;
– Level 2 – observable inputs other than quoted prices included within level 1;
– Level 3 – unobservable inputs.

The Group’s investment properties are valued by Colliers on a quarterly basis. The valuation methodology used is the yield model, which is a
consistent basis for the valuation of investment properties within the healthcare industry. This model has regard to the current investment market
and evidence of investor interest in properties with income streams secured on healthcare businesses. On an asset-specific basis, the valuer
makes an assessment of: the quality of the asset; recent and current performance of the asset; and the financial position and performance of
the tenant operator. This asset specific information is used alongside a review of comparable transactions in the market and an investment yield
is applied to the asset which, along with the contracted rental level, is used to derive a market value.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic Report9. Investments (continued)
In determining what level of the fair value hierarchy to classify the Group’s investments within, the Directors have considered the content and
conclusion of the position paper on IFRS 13 prepared by the European Public Real Estate Association (‘EPRA’), the representative body of the
publicly listed real estate industry in Europe. This paper concludes that, even in the most transparent and liquid markets, it is likely that valuers
of investment property will use one or more significant unobservable inputs or make at least one significant adjustment to an observable input,
resulting in the vast majority of investment properties being classified as level 3.

Observable market data is considered to be that which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary,
and provided by independent sources that are actively involved in the relevant market. In arriving at the valuation Colliers make adjustments to
observable data of similar properties and transactions to determine the fair value of a property and this involves the use of considerable judgement.

Considering the Group’s specific valuation process, industry guidance, and the level of judgement required in the valuation process, the Directors
believe it appropriate to classify the Group’s investment properties within level 3 of the fair value hierarchy.

The Group’s investment properties, which are all care homes, are considered to be a single class of assets. The weighted average net initial yield
on these assets is ahead of the blended 7 per cent modelled at the time of launch. The yield on individual assets ranges from 6.25 per cent to
8.0 per cent. There have been no changes to the valuation technique used through the period, nor have there been any transfers between levels.

The key unobservable inputs made in determining the fair values are:

– Estimated rental value (‘ERV’): The rent at which space could be let in the market conditions prevailing at the date of valuation; and
– Yield: The equivalent yield is defined as the internal rate of return of the cash flow from the property, assuming a rise to ERV at the next review,

but with no further rental growth.

The ERV for the total portfolio is materially the same as the passing rent which is disclosed on page 12.

A decrease in the ERV applied to an asset will decrease the fair value of the asset, and consequently decrease the Group’s reported income from
unrealised gains on investments. An increase in the ERV will increase the fair value of an asset and increase the Group’s income.

A decrease of 0.25 per cent in the investment yield applied to the portfolio will increase the fair value of the portfolio by £7.8 million (2015: £5.1 million),
and consequently increase the Group’s reported income from unrealised gains on investments. An increase of 0.25 per cent in the yield will decrease
the fair value of the portfolio by £7.3 million (2015: £4.8 million) and reduce the Group’s income.

10. Trade and other receivables

Non-current trade and other receivables

Cash held for tenants

Total

Current trade and other receivables

Fixed rent reviews
Development loan
Cash deposits held in escrow for property purchases
Lease incentives
Accrued income
Other debtors and prepayments

Total

As at
30 June 2016
£’000

As at
30 June 2015
£’000

3,742

2,530

As at
30 June 2016
£’000

As at
30 June 2015
£’000

9,719
2,170
910
227
173
23

13,222

5,584
–
605
223
–
45

6,457

At the year-end, trade and other receivables include a fixed rent review debtor of £9,719,000 (2015: £5,584,000) which represents the effect
of recognising guaranteed rental uplifts on a straight line basis over the shorter of the term to lease expiry or to the first tenant break option,
in accordance with the Group’s accounting policies spreading uplifts and incentives over the lease term.

During February 2016, the Group exchanged contracts to acquire a 12-bed specialist care home in Bricket Wood, St Albans (see note 17). As part
of this acquisition, the Group entered into a secured loan facility agreement with HSN Care (‘HSN’), the specialist care provider who will be the tenant
of the home on completion. The Company had agreed to provide HSN with a loan of £2,170,000 for the purposes of carrying out the development
of the property and this was fully drawn down at the year end. The loan carries interest at 8.85 per cent per annum and the loan capital and accrued
interest will be repayable from the consideration proceeds once the acquisition completes.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Financial StatementsNotes to the Consolidated Financial Statements(continued)

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

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

THR1 owns 100 per cent of the share capital of THR Number Two Limited (‘THR2’), a company registered in England & Wales. The principal
activity of THR2 is that of an investment and property company. THR1 also owns 100 per cent of the share capital of THR Number 3 Limited
(‘THR3’), a company registered in England & Wales. The principal activity of THR3 is that of an investment and property company.

Acquisition of THR Number 4 Limited (‘THR4’)
On 6 October 2015, the Company acquired 100 per cent of the voting shares of THR Number 4 Limited, a company registered in England
and Wales. Prior to acquisition, the company owned and operated a care home. As part of the transaction, the operation of the care home was
sold to a third party specialist elderly care home operator, who entered into an agreement with the company to lease the care home property.
Therefore from the date of acquisition onwards, the company has been an investment and property company.

Acquisition of THR Number 5 Limited (‘THR5’)
On 3 February 2016, the Company acquired 100 per cent of the voting shares of THR Number 5 Limited, a company registered in England and
Wales. Prior to acquisition, the company owned and operated a care home. As part of the transaction, the care home continued to be operated
by the incumbent operator, who entered into an agreement with the company to lease the property. Therefore from the date of acquisition
onwards, the company has been an investment and property company.

Acquisition of THR Number 6 Limited (‘THR6’)
On 23 June 2016, the Company acquired 100 per cent of the voting shares of Hi-Hand Limited, a company registered in England and Wales.
Prior to acquisition, the company owned and operated a care home. As part of the transaction, the operation of the care home was sold
by the company to a UK-wide care home operator, who entered into an agreement with the company to lease the property. Therefore from
the date of acquisition onwards, the company has been an investment and property company. Subsequent to the year end, the name of the
company was changed from Hi-Hand Limited to THR Number 6 Limited.

Fair value recognised on acquisition
The fair value of the identifiable assets and liabilities of the subsidiaries acquired by the Company during the year ended 30 June 2016 were:

Investment property
Cash and cash equivalents
Trade and other receivables

Total assets

Trade and other payables

Total liabilities

Total identifiable net assets at fair value

Purchase consideration transferred

Cash flow on acquisition

Net cash acquired with the subsidiary
Cash paid

Net cash flow on acquisition

THR4
£’000

6,048
28
–

6,076

–

6,076

THR4
£’000

28
(6,076)

(6,048)

THR5
£’000

13,750
521
–

14,271

(207)

14,064

THR5
£’000

521
(14,064)

(13,543)

THR6
£’000

7,500
1
–

7,501

–

7,501

THR6
£’000

1
(7,501)

(7,500)

Cost of corporate acquisitions

142

398

458

The Group sought independent valuations by Colliers of the investment property held within each of the companies at the time of acquisition.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic Report11. Investment in subsidiary undertakings (continued)
From the date of acquisition, the profit and total comprehensive income of each company included within the Consolidated Statement of
Comprehensive Income for the year ended 30 June 2016 were as follows:

Revenue
Capital

Total

12. Cash and cash equivalents
All cash balances at the year-end were held in cash, current accounts or deposit accounts.

Cash at bank and in hand
Short-term deposits

Total

13. Bank loan

Principal amount outstanding
Set-up costs
Amortisation of set-up costs

Total

THR4
£’000

341
(798)

(457)

THR5
£’000

407
(90)

317

THR6
£’000

6
(11)

(5)

As at
30 June 2016
£’000

As at
30 June 2015
£’000

1,284
63,823

65,107

1,159
28,000

29,159

As at
30 June 2016
£’000

As at
30 June 2015
£’000

21,000
(836)
285

20,449

31,510
(708)
63

30,865

At 30 June 2015, the Group had a £35.0 million committed term loan and revolving credit facility with the Royal Bank of Scotland plc (‘RBS’) which
was repayable on 23 June 2019. With effect from 1 April 2016, the quantum of the facility was increased to £50.0 million, with other significant
terms of the loan remaining unchanged. Interest accrues on the bank loan at a variable rate, based on 3 month LIBOR plus margin and mandatory
lending costs, and is payable quarterly. At 30 June 2016, the margin was 2 per cent per annum for the duration of the loan. A non-utilisation fee of
1 per cent per annum was payable on any undrawn element of the facility.

This bank loan is secured by way of a fixed and floating charge over the whole of the assets of the THR Number One PLC Group (‘THR1 Group’)
which consists of THR1 and its two directly held subsidiaries, THR2 and THR3. Under the bank covenants related to this loan, the Group is to
ensure that for THR1 Group:

– The loan to value percentage does not exceed 50 per cent; and
– The interest cover is greater than 300 per cent on any calculation date.

THR1 Group has complied with all the bank loan covenants during the year.

On 22 June 2016, the Group entered into an interest rate swap for a notional value of £21.0 million, with a starting date of 7 July 2016 and
a termination date of 23 June 2019. Under the terms of the interest rate swap, the Group will pay quarterly a fixed rate of interest of 0.85 per cent
per annum and will receive 3-month LIBOR. The fair value of the interest rate swap at 30 June 2016 was a liability of £316,000 (2015: nil).

On 1 September 2016, the Group extended its loan facility to 1 September 2021, with an option of two further one year extensions thereafter,
subject to the consent of RBS. The margin on the extended facility was reduced from 2.0 per cent to 1.5 per cent per annum for the duration of the
loan. On 21 September 2016, the Group entered into a second interest rate swap under which, for the period from 24 June 2019 to 1 September 2021,
the Group will pay quarterly a fixed rate of interest of 0.70 per cent per annum and will receive 3-month LIBOR. Inclusive of both the interest rate
swaps, the interest rate on the Group’s £21.0 million of drawn down borrowings was therefore fixed at an all-in rate of 2.35 per cent per annum until
23 June 2019 and 2.20 per cent per annum from 24 June 2019 to 1 September 2021. There were no other material amendments to the loan facility.

14. Trade and other payables

Non-current trade and other payables

Rental deposits

Total

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

As at
30 June 2016
£’000

As at
30 June 2015
£’000

3,742

2,530

Financial StatementsNotes to the Consolidated Financial Statements(continued) Current trade and other payables

Rental income received in advance
Investment Manager’s fees payable including performance fees
Loan interest payable
Tax payable
Other payables

Total

The Group’s payment policy is to ensure settlement of supplier invoices in accordance with stated terms.

15. Stated Capital Movements

Allotted, called-up and fully paid ordinary shares of no par value
Opening balance
Issued on 27 August 2015
Issued on 20 November 2015
Issued on 12 May 2016

Expenses of issue

Dividends allocated to capital

Balance as at 30 June 2016

As at
30 June 2016
£’000

As at
30 June 2015
£’000

2,806
885
176
73
1,062

5,002

2,272
450
150
6
745

3,623

As at 30 June 2016

Number of
shares

£’000

142,298,226
14,229,822
15,652,803
80,000,000

136,846
14,159
16,279
84,000

251,284
(2,778)

248,506
(1,973)

252,180,851

246,533

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

During the year to 30 June 2016, the Company repurchased 14,229,822 ordinary shares (2015: nil) into treasury at a total cost of £14,159,000.
During the year to 30 June 2016, the Company resold 14,229,822 ordinary shares (2015: nil) from treasury raising gross proceeds of £14,799,000.
At 30 June 2016, the Company did not hold any ordinary shares in treasury (2015: nil). Transactions through treasury are recorded through the
capital reserve and are not included in the stated capital movements above.

During the year, the Company issued 109,882,625 ordinary shares raising gross proceeds of £114,438,000. The total expenses of issuing these
shares were £2,778,000.

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

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

Capital risk management
The objective of the Group is to provide ordinary shareholders with an attractive level of income together with the potential for income and capital
growth from investing in a diversified portfolio of freehold and long leasehold care homes that are let to care home operators; and other healthcare
assets in the UK.

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

To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders, issue new
shares or buyback shares for cancellation or for holding in treasury.

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

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

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic Report16. Financial instruments
Consistent with its objective, the Group holds UK care home property investments. In addition, the Group’s financial instruments comprise cash
and receivables and payables that arise directly from its operations. The Group’s exposure to derivative instruments consists of an interest rate
swap used to fix the interest rate on the Group’s variable rate borrowings.

The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, liquidity risk,
interest rate risk and market price risk. There is no foreign currency risk as all assets and liabilities of the Group are maintained in pounds sterling.

The Board reviews and agrees policies for managing the Group’s risk exposure. These policies are summarised below and have remained
unchanged for the year under review. These disclosures include, where appropriate, consideration of the Group’s investment properties which,
whilst not constituting financial instruments as defined by IFRS, are considered by the Board to be integral to the Group’s overall risk exposure.

Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group.
At the reporting date, the Group’s financial assets exposed to credit risk amounted to £68.4 million (2015: £29.8 million).

In the event of default by a tenant if it is in financial difficulty or otherwise unable to meet its obligations under the lease, the Group will
suffer a rental shortfall and incur additional expenses until the property is relet. These expenses could include legal and surveyor’s costs
in reletting, maintenance costs, insurances, rates and marketing costs and may have a material adverse impact on the financial condition
and performance of the Group and/or the level of dividend cover. The Board receives regular reports on concentrations of risk and any tenants
in arrears. The Investment Manager monitors such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants.

There were no financial assets which were either past due or considered impaired at 30 June 2016 (2015: nil).

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

During the year, due to the quantum of cash balances held, counterparty risk was spread by placing cash across two different financial
institutions and at the year-end the Group held £26.0 million (2015: £14.1 million) with The Royal Bank of Scotland plc and £39.1 million
(2015: £15.0 million) with Lloyds Bank plc.

Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments.
The Group’s investments comprise UK care homes. Property and property-related assets in which the Group invests are not traded in an
organised public market and may be illiquid. As a result, the Group may not be able to liquidate quickly its investments in these properties
at an amount close to their fair value in order to meet its liquidity requirements.

The Group’s liquidity risk is managed on an on-going basis by the Investment Manager and monitored on a quarterly basis by the Board. In order to
mitigate liquidity risk the Group aims to have sufficient cash balances (including the expected proceeds of any property sales) to meet its obligations
for a period of at least twelve months.

At the reporting date, the maturity of the financial assets was:

Financial assets as at 30 June 2016

Cash
Development loan
Cash held for tenants
Other debtors and prepayments

Total

Three months
or less
£’000

More than three
months but less
than one year
£’000

65,107
2,170
–
1,333

68,610

–
–
–
–

–

More than
one year
£’000

–
–
3,742
–

3,742

Total
£’000

65,107
2,170
3,742
1,333

72,352

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Financial StatementsNotes to the Consolidated Financial Statements(continued)

Financial assets as at 30 June 2015

Cash
Cash held for tenants
Other debtors and prepayments

Total

At the reporting date, the maturity of the financial liabilities was:

Financial liabilities as at 30 June 2016

Bank loan and interest rate swap
Rental deposits
Other payables

Total

Financial liabilities as at 30 June 2015

Bank loan
Rental deposits
Other payables

Total

Three months
or less
£’000

More than three
months but less
than one year
£’000

29,159
–
873

30,032

–
–
–

–

Three months
or less
£’000

More than three
months but less
than one year
£’000

224
–
2,196

2,420

665
–
–

665

Three months
or less
£’000

More than three
months but less
than one year
£’000

228
–
1,351

1,579

678
–
–

678

More than
one year
£’000

–
2,530
–

2,530

More than
one year
£’000

22,760
3,742
–

26,502

More than
one year
£’000

37,693
2,530
–

40,223

Total
£’000

29,159
2,530
873

32,562

Total
£’000

23,649
3,742
2,196

29,587

Total
£’000

38,599
2,530
1,351

42,480

The total amount due to RBS under the interest-bearing £50 million bank facility (30 June 2015: £35 million bank facility) includes the expected
hedged interest payments due under both the loan and interest rate swap combined (see note 13 for further details) assuming that both the
drawn element of the loan and the notional value of the interest rate swap remain unchanged at £21 million from 30 June 2016 until the original
expiry on 23 June 2019. The commitment fee payable on the undrawn element of the facility is included. The extension of the loan facility on
1 September 2016 (see note 13) is not reflected in these figures.

In the prior year, at which date the interest rate on the loan had not been hedged, the amount payable under the bank loan included the expected
interest payments due based on the rate of 3 month LIBOR at 30 June 2015. This assumed the facility had been fully drawn down from 30 June 2015
until expiry on 23 June 2019.

Interest rate risk
Some of the Company’s financial instruments are interest-bearing. Interest-rate risk is the risk that future cash flows will change adversely as a result
of changes in market interest rates.

The Group’s policy is to hold cash in variable rate or short term fixed rate bank accounts. Interest is received on cash at fixed rates of 0.50 per cent
and 0.55 per cent and earns interest at these fixed rates for six months. Exposure varies throughout the period as a consequence of changes
in the composition of the net assets of the Group arising out of the investment and risk management policies. These balances expose the Group
to cash flow interest rate risk as the Group’s income and operating cash flows will be affected by movements in the market rate of interest.

The Group has a £50 million (2015: £35 million) committed term loan and revolving credit facility which at 30 June 2016 was charged interest
at a rate of 3 month LIBOR plus a margin of 2 per cent per annum and at the year-end £21.0 million was drawn down (2015: £31.5 million).
The bank borrowings are carried at amortised cost and the Group considers this to be a close approximation to fair value. The fair value of the
bank borrowings is affected by changes in the market interest rate.

The Group has hedged its exposure on the £21.0 million loan drawn down at 30 June 2016 through entering into a fixed rate Interest Rate Swap
(see note 13). Fixing the interest rate exposes the Group to fair value interest rate risk. At 30 June 2016, an increase of 0.25 per cent in interest
rates would have increased the fair value of the interest rate swap and the reported total comprehensive income for the year by £0.2 million
(2015: nil). A decrease in interest rates would have had an equal and opposite effect.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic Report

16. Financial instruments (continued)
Interest rate risk (continued)
The following table sets out the carrying amount of the Group’s financial instruments that are exposed to interest rate risk:

Cash and cash equivalents
Development loan
Bank loan

As at 30 June 2016

As at 30 June 2015

Fixed rate
£’000

Variable rate
£’000

Fixed rate
£’000

Variable rate
£’000

65,107
2,170
–

–
–
21,000

29,159
–
–

–
–
31,510

Based on the Group’s exposure to cash flow interest rate risk, an increase of 0.25 per cent in interest rates would have increased the reported
profit for the year and the net assets at the year-end by £116,000 (2015: a decrease of £6,000), a decrease in interest rates would have an equal
and opposite effect. These movements are calculated based on balances as at 30 June 2016 (30 June 2015) and may not be reflective of actual
future conditions.

Market price risk
The management of market price risk is part of the investment management process and is typical of a property investment company. The portfolio is
managed with an awareness of the effects of adverse valuation movements through detailed and continuing analysis, with an objective of maximising
overall returns to shareholders. Investments in property and property-related assets are inherently difficult to value due to the individual nature of each
property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will
reflect the actual sales price even where such sales occur shortly after the valuation date. Such risk is minimised through the appointment of external
property valuers. The basis of valuation of the property portfolio is set out in detail in the accounting policies and note 9.

Any changes in market conditions will directly affect the profit and loss reported through the Statement of Comprehensive Income. Details of the
Group’s investment property portfolio held at the balance sheet date are disclosed in note 9. A 10 per cent increase in the value of the investment
properties held as at 30 June 2016 (30 June 2015) would have increased net assets available to shareholders and increased the net income for
the year by £20.1 million (2015: £13.8 million); an equal and opposite movement would have decreased net assets and decreased the net income
by an equivalent amount.

The calculations are based on the investment property valuations at the respective balance sheet date and are not representative of the year
as a whole, nor reflective of future market conditions.

17. Capital commitments
In December 2014, the Company entered into a forward commitment agreement to acquire a purpose-built care home in Tonbridge, Kent, for
a consideration of £12.5 million, including acquisition costs. The property is currently being built with the development expected to reach practical
completion later in 2016, at which point payment will become due.

In February 2016, the Company exchanged contracts to acquire a 12-bed specialist care home in Bricket Wood, St Albans for approximately
£2.3 million including acquisition costs. As part of the agreed terms, the Group has provided a short-term loan facility to HSN Care, the tenant
operator who holds the lease on the property, in order to fund the land acquisition and refurbishment of the property with any delays in timing
or cost overruns remaining the responsibility of HSN. The loan facility attracts an accrued coupon of 8.85 per cent per annum and the loan capital
and accrued interest will be repayable from the consideration proceeds once the acquisition completes. This loan is included in trade and other
receivables at 30 June 2016 (see note 10).

In June 2016, the Company exchanged contracts to acquire a purpose-built care home in the village of Kirby Cross near Frinton-on-Sea, Essex.
The home will be acquired for approximately £9.2 million, including acquisition costs, once works have been undertaken to complete the home
to the Group’s specification. Completion of the transaction is expected in January 2017, at which point payment will become due.

The Company had other capital commitments of approximately £1.5 million at 30 June 2016 in relation to asset acquisitions.

18. Lease length
The Group leases out its investment properties under operating leases.

The minimum lease payments based on the unexpired lessor lease length at the year-end were as follows (based on annual rentals):

Less than one year
Between two and five years
Over five years

Total

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

As at
30 June 2016
£’000

As at
30 June 2015
£’000

15,283
63,788
505,704

584,775

11,151
42,289
395,847

449,287

Financial StatementsNotes to the Consolidated Financial Statements(continued) The largest single tenant at the year-end accounted for 22.2 per cent (2015: 31.7 per cent) of the current annual rental income.

There were no unoccupied properties at the period end.

The Group has entered into commercial property leases on its investment property portfolio. These properties, held under operating leases, are
measured under the fair value model as the properties are held to earn rentals. All leases are non-cancellable leases with lease terms of between
14 and 35 years.

19. Related Party Transactions
The Board of Directors is considered to be a related party. No Director has an interest in any transactions which are, or were, unusual in their
nature or significant to the nature of the Company.

Mr Ross is a director of the Company Secretary and the Administrator, R&H Fund Services (Jersey) Limited and R&H Fund Services Limited
respectively, which each receive fees from the Company. Mrs Jones is a director of the Company Secretary, R&H Fund Services (Jersey) Limited.
Secretarial and administration fees for the period are disclosed in note 3.

The Directors of the Company received fees for their services. Total fees for the year were £115,000 (2015: £113,000) of which £16,000
(2015: £16,000) remained payable at the year-end.

Target Advisers LLP is considered to be a related party. Target Advisers LLP received £2,654,000 (2015: £1,606,000) in relation to the year of
which £871,000 (2015: £466,000) related to performance fee. Of this amount £885,000 (2015: £450,000) (inclusive of VAT) remained payable
at the year-end.

20. Operating segments
The Board has considered the requirements of IFRS 8 ‘Operating Segments’. The Board is of the view that the Group is engaged in a single
segment of business, being property investment, and in one geographical area, the United Kingdom, and that therefore the Group has only
a single operating segment. The Board of Directors, as a whole, has been identified as constituting the chief operating decision maker of the Group.
The key measure of performance used by the Board to assess the Group’s performance is the EPRA NAV. The reconciliation between the NAV,
as calculated under IFRS, and the EPRA NAV is detailed in note 8.

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

– One of the key financial indicators received and reviewed by the Board is the total return from the property portfolio taken as a whole;
– There is no active allocation of resources to particular types or groups of properties in order to try to match the asset allocation of the

benchmark; and

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

21. Contingent assets and liabilities
One property within the portfolio met contracted performance conditions during the period and this is expected to trigger a deferred payment
of £2.0 million to the vendor. The Group will become entitled to receive an uplift in rental income from the property commencing at the date the
deferred payment is made. All other things being equal, this will result in an increase in the market value of the property by a value equivalent
to the deferred payment made. Therefore, in order to ensure that the cost is matched against the benefit that will accrue and ensure that the
Group’s net assets are not misstated, the deferred consideration has not been accrued at 30 June 2016 and will instead be recognised on the
date of payment, with the offsetting increase in the market value of the property being recognised on the same date.

22. Post Balance Sheet Events
On 26 August 2016, the Group completed the acquisition of two modern, purpose built care homes located in Dundee, Scotland and Sandiacre,
Derbyshire for approximately £14.0 million including acquisition costs. The Group acquired the properties through the Company’s corporate
acquisition of two existing property-holding companies incorporated in Gibraltar.

The properties comprise a total of 151 bedrooms with full en-suite bathrooms including wetrooms and opened in 2007 and 2015. A refurbishment
programme on the older property will be completed imminently with both properties due to reach operational maturity by the year end. The homes
will continue to be operated by the incumbent operator, Hudson Healthcare. The homes are subject to 35-year leases with RPI-linked cap and
collar. The net initial yield on the transaction is broadly consistent with the overall average of the Group’s portfolio.

On 1 September 2016, the Group completed the acquisition of a modern, purpose built care home in Mytchett near Camberley, Surrey, for
approximately £6.5 million including acquisition costs. Kingsmead House was completed in 2015 and has 40 bedrooms over three floors. Upon
acquisition, the home was leased back to the existing tenant, Care Concern Group, who has operated the home since its opening. The lease is
for a term of 35-years and is subject to an RPI-linked cap and collar. The net initial yield on the transaction is broadly consistent with the overall
average of the Group’s portfolio.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic Report23. Alternative Investment Fund Managers (‘AIFM’) Directive
In accordance with the AIFM Directive, information in relation to the Group’s leverage and the remuneration of the Company’s AIFM, Target
Advisers LLP, is required to be made available to investors. In accordance with the Directive, the AIFM’s remuneration policy is available from
Target Advisers LLP on request and the numerical remuneration disclosures in relation to the AIFM’s first relevant accounting period will be
made available in due course.

The Group’s maximum and average actual leverage levels at 30 June 2016 are shown below:

Leverage exposure

Maximum limit
Actual

Gross
method

3.00
0.91

Commitment
method

3.00
1.17

For the purposes of the AIFM Directive, leverage is any method which increases the Group’s exposure, including the borrowing of cash and the
use of derivatives. It is expressed as a percentage of the Group’s exposure to its net asset value and is calculated on both a gross and
commitment method.

Under the gross method, exposure represents the sum of the Group’s positions after deduction of cash balances, without taking account of
any hedging or netting arrangements. Under the commitment method, exposure is calculated without the deduction of cash balances and after
certain hedging and netting positions are offset against each other. Both methods include the Group's interest rate swap measured at notional value.

The leverage limits are set by the AIFM and approved by the Board and are in line with the maximum leverage levels permitted in the Company’s
Articles of Incorporation. The AIFM is also required to comply with the gearing parameters set by the Board in relation to borrowings.

Detailed regulatory disclosures to investors in accordance with the AIFM Directive are contained on the Company’s website.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Financial StatementsNotes to the Consolidated Financial Statements(continued) Corporate Governance

Board of Directors

Malcolm Naish
Independent Non-Executive Chairman
Mr Naish was a director of Real Estate at Scottish Widows Investment Partnership (‘SWIP’) until 2012, with responsibility for a portfolio of commercial property assets spanning
the UK, Continental Europe and North America, and for SWIP’s real estate investment management business. Mr Naish has over 40 years’ experience of working in the real
estate industry and qualified as a Chartered Surveyor in 1976. Immediately prior to joining SWIP he was director and head of DTZ Investment Management, where he also led
new business development in the UK and international markets. He was a founding partner of Jones Lang Wootton Fund Management, and UK Managing Director of LaSalle
Investment Management. In 2002, he co-founded Fountain Capital Partners, a pan-European real estate investment manager and adviser. Mr Naish was also Chairman of the
Scottish Property Federation for 2010/2011. He now holds a number of non-executive positions and roles in the charity sector.

Date of appointment: 30 January 2013
Country of residence: UK
All other public company directorships: GCP Student Living Plc, Ground Rents Income Fund Plc

Professor June Andrews OBE
Independent Non-Executive Director
Professor Andrews is a Fellow of the Royal College of Nursing and a world renowned dementia specialist. She set up and directed the Centre for Change and Innovation in the
Scottish Executive Health Department and was the director of the Dementia Services Development Centre at the University of Stirling. Professor Andrews is a former trade
union leader, NHS manager and senior civil servant.

Date of appointment: 30 January 2013
Country of residence: UK
All other public company directorships: None

Gordon Coull
Independent Non-Executive Director and Chairman of Audit Committee
Mr Coull was formerly a partner at Ernst & Young LLP where he specialised in investment trusts and property. He has served as an audit committee member at the Universities
Superannuation Scheme since April 2012 and as a director of Cornelian Asset Managers Group from May 2015.

Date of appointment: 30 January 2013
Country of residence: UK
All other public company directorships: None

Thomas Hutchison III
Independent Non-Executive Director and Senior Independent Director
Mr Hutchison has more than 40 years of experience focused in the lodging, hospitality, real estate development, seniors’ housing and financial services industries. He is the
principal founder of Legacy Hotel Advisors, LLC and Legacy Healthcare Properties, LLC where he served as the Chairman of both companies. In January 2000, he joined CNL
Financial Group, Inc. where he held several key executive positions over an eight year period: CEO of each of CNL Retirement Properties, Inc., CNL Hotels & Resorts, Inc., CNL
Real Estate Group, Inc., CNL Realty and Development, Inc. and CNL Income Properties, Inc. Mr Hutchison is currently a director for KSL Capital Partners LLC, ClubCorp, Inc.,
Hersha Hospitality Trust and Trinity Forum Europe. He is also a member of The Real Estate Roundtable, Leadership Council for Communities in Schools and the Advisory
Council of the Erickson School of Aging Studies. Additionally, he serves as a senior adviser to various service industry public companies. He is a former Director of Zapata
Corporation, General Development Corporation, Vision360 and Trinity Forum.

Date of appointment: 30 January 2013
Country of residence: United States of America
All other public company directorships: None

Hilary Jones
Independent Non-Executive Director
Mrs Jones joined Rawlinson & Hunter’s (‘R&H’) fund administration business in Jersey in 1999 and was promoted to the role of Principal Manager in 2005. Since 2009 she has
been a director of R&H Jersey and leads a team responsible for a wide range of corporate services, in particular for property funds. Mrs Jones is a fellow of the Association of
Chartered Certified Accountants and a past member of the Legal & Technical Committee of the Jersey Funds Association; she also sat on the Authorisation Users panel which
liaised with the JFSC on behalf of the funds industry regarding specific matters relating to the authorisation of funds.

Date of appointment: 22 July 2014
Country of residence: Jersey
All other public company directorships: None

Graeme Ross
Independent Non-Executive Director
Mr Ross is a Chartered Accountant and has over 25 years’ experience of the offshore funds sector. He joined R&H’s fund administration business in Jersey in 1986 and
became a partner in 1995. In 2010 Mr Ross was appointed as Senior Partner of R&H in Jersey with responsibility for the firm’s overall business strategy.

Date of appointment: 22 July 2014
Country of residence: Jersey
All other public company directorships: ETFS Commodity Securities Limited, ETFS Equity Securities Limited, ETFS Foreign Exchange Limited, ETFS Hedged
Commodity Securities Limited, ETFS Hedged Metal Securities Limited, ETFS Metal Securities Limited, ETFS Oil Securities Limited, Gold Bullion Securities Limited,
Genagro Limited, RHFS Growth & Income Funds Limited, Swiss Commodity Securities Limited.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic ReportInvestment Manager

The Investment Manager
The Company has appointed Target Advisers LLP (‘Target’ or the ‘Investment Manager’) as its investment manager pursuant to the Investment
Management Agreement. The Investment Manager is a limited liability partnership which is authorised and regulated by the FCA and has the
responsibility for the day-to-day management of the Group and advises the Group on the acquisition of its investment portfolio and on the
development, management and disposal of UK care homes and other healthcare assets in the portfolio. It comprises a team of experienced
individuals with expertise in the operation of and investment in healthcare property assets.

Alternative Investment Fund Managers Directive (‘AIFMD’)
The Board has appointed Target as the Company’s AIFM and Target has received FCA approval to act as AIFM of the Company; your Company
is therefore fully compliant with the AIFMD. An additional requirement of the AIFMD is for the Company to appoint a depositary, which will oversee
the property transactions and cash arrangements and other AIFMD required depositary responsibilities. The Board has appointed Augentius
Depositary Company Limited to act as the Company’s depositary.

Key personnel of the Investment Manager
The Investment Manager’s team comprises eight healthcare investment professionals. The key healthcare personnel who are responsible for
managing the portfolio are:

Kenneth MacKenzie MA CA

Kenneth MacKenzie is founder and managing partner of Target Advisers. He is a Chartered Accountant with 40 years of business leadership
experience, last thirteen in healthcare. He is the founder of Kames Target Healthcare Fund and as well as the Company each of which are long
term income funds with conservative and profitable track records and Target Advisers the premier niche senior living fund managers in the UK.
In 2005, he led the acquisition of Independent Living Services ('ILS'), Scotland’s largest independent domiciliary care provider. Kenneth grew
this business by acquisition and put in place a new senior management team before exiting via a disposal to a private equity house. Prior to
his involvement with ILS, Kenneth negotiated the proposed acquisition of a UK independent living business in a JV with the large US care home
operator, Sunrise Senior Living, as they looked to enter the UK. Prior to his involvement in the healthcare sector, Kenneth has owned businesses
in the publishing, IT, shipping and accountancy sectors and he holds a number of pro-bono charitable roles.

John Flannelly BAcc FCA

John Flannelly is investment partner of Target Advisers. He is a Chartered Accountant with 19 years’ experience, last ten in real estate investment
management. He is the investment partner at Target Advisers since inception in 2010 with primary responsibility for all investment activity for the
Kames Target Healthcare Fund and the Company. John has been involved in the appraisal of several hundred care home opportunities resulting
in the acquisition of circa 60 properties for those client funds. Prior to joining Target Advisers, John held board positions at a UK top-10 care
home operator and a care home development business during his time as investment director for an institutional investor. John started his career
at Arthur Andersen where he worked on audits, financial due diligence and corporate finance projects before moving to the Bank of Scotland
initially to structure finance packages for management buy-outs and latterly to a role in real estate investment management.

Andrew Brown

Andrew Brown is healthcare partner of Target Advisers. Andrew has spent most of his life in the senior care sector, currently visiting circa 100
homes per year in his current role as Healthcare Partner at Target Advisers, of which he is one of the founding partners. Prior to joining Target
Advisers he and his family developed one of the largest and most unique continuing care retirement communities in the UK, Auchlochan Trust.
Andrew has played the role of developer, builder and operator of care homes resulting in a community of approximately 350 care beds, almost
100 retirement properties and a staff of over 300. These facilities included both residential care homes and nursing homes and Andrew was
directly responsible for operations. Auchlochan Trust was also involved in Trinity Care plc as an investor.

Donald Campbell

Donald Campbell is portfolio partner at Target Advisers. Donald is a Chartered Accountant with 28 years’ experience. He was a partner with
Deloitte LLP for 16 years specialising in private markets tax advisory work, where his clients included care home operators, property investors
and fund managers. Donald’s role at Target Advisers involves reviewing monthly financial performance data provided by the operators to ensure
compliance with the lease terms. He is also responsible for reporting financial information and Key Performance Indicators on a quarterly basis
to the Board.

In addition to the healthcare investment professionals:

Gordon Bland BAcc CA

Gordon Bland is finance director at Target Advisers. He is a Chartered Accountant with extensive experience of financial reporting within the
asset management industry. Gordon’s responsibilities at Target Advisers extend to: advising on strategic planning and formulating business
plans, financial modelling and budget analysis, regulatory control, managing relationships with debt partners, and ensuring provision of financial
reporting to stakeholder groups. Prior to joining Target Advisers, Gordon worked at PricewaterhouseCoopers for almost ten years, including two
years in their Toronto office, serving asset management and financial services clients in the UK, Canada and Australia.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceDirectors’ Report

The Directors present their report, along with the financial statements of the Group on pages 16 to 36, for the year ended 30 June 2016.

Results and dividends
The results for the year are set out in the attached financial statements. The Group declared four quarterly interim dividends, each of 1.545 pence
per share, to shareholders in relation to the year ended 30 June 2016.

The Company
The Company is a Jersey registered closed-ended property investment company and its shares have a premium listing on the Official List of the
UK Listing Authority and are traded on the main market of the London Stock Exchange.

Investment Objective
The Group’s investment objective is to provide shareholders with an attractive level of income together with the potential for capital and income
growth from investing in a diversified portfolio of freehold and long leasehold care homes that are let to care home operators; and other
healthcare assets in the UK.

Investment Policy
The Group pursues its objective by investing in a portfolio of care homes, predominantly in the UK, that are let to care home operators on full
repairing and insuring leases that are subject to annual uplifts based on increases in the UK retail prices index (subject to caps and collars) or
fixed uplifts. The Group is also able to generate up to 15 per cent of its gross income, in any financial year, from non-rental revenue or profit related
payments from care home operators under management contracts in addition to the rental income due under full repairing and insuring leases.

In order to spread risk and diversify its portfolio, the Group is also permitted to invest up to: (i) 15 per cent of its gross assets, at the time of
investment, in other healthcare assets, such as properties which accommodate GP practices and other healthcare related services including
occupational health and physiotherapy practices, pharmacies, special care schools and hospitals; and (ii) 25 per cent of its gross assets,
at the time of investment, in indirect property investment funds (including joint ventures) with a similar investment policy to that of the Group.
The Directors have no current intention to acquire other healthcare assets or indirect property investment funds. The Group may also acquire
or establish companies, funds or other SPVs which themselves own assets falling within the Group’s investment policy.

The Group may either invest in assets that require development or that are under development, which when completed would fall within the
Group’s investment policy to invest in UK care homes and other healthcare assets, including by means of the forward funding of developments
and forward commitments to purchase completed developments, provided that the Company will not undertake speculative development and
that the gross budgeted development costs to the Group of all such developments, including forward funding and forward commitments, does
not exceed 25 per cent. of the Group’s gross assets on the commencement of the relevant development. Any development will only be for
investment purposes.

In order to manage risk in the portfolio, at the time of investment, no single asset shall exceed in value 20 per cent of the Group’s gross asset
value and, in any financial year beginning after the Group is fully invested, the rent received from a single tenant or tenants within the same group
(other than from central or local government, or primary health trusts) is not expected to exceed 30 per cent of the total income of the Group,
at the time of investment.

The Group will not acquire any asset or enter into any lease or related agreement if that would result in a breach of the conditions applying to the
Group’s REIT status.

The Group is permitted to invest cash held for working capital purposes and awaiting investment in cash deposits, gilts and money market funds.

Gearing, calculated as borrowings as a percentage of the Group’s gross assets, may not exceed 35 per cent at the time of drawdown. The Board
currently intends that, over the medium term, borrowings of the Group will represent approximately 20 per cent. of the Group’s gross assets at
the time of drawdown. However, it is expected that Group borrowings will exceed this level from time to time as borrowings are incurred to finance
the growth of the Group’s Property Portfolio.

Any material change to the investment policy will require the prior approval of shareholders.

The investment policy was amended during the year and the policy as stated above was approved by shareholders, by ordinary resolution,
at a general meeting held on 6 May 2016.

An analysis of the Company’s property portfolio at 30 June 2016 is shown on page 13.

Dividend Policy
Subject to market conditions and the Company’s performance, financial position and financial outlook, it is the Directors’ intention to pay an
attractive level of dividend income to Shareholders on a quarterly basis. The dividends paid by the Company have been fully covered during
periods when the Company has been fully invested and the Investment Manager seeks to execute transactions which are expected to assist
in achieving a fully covered dividend. In order to ensure that the Company continues to pay the required level of distribution to maintain Group
REIT status and to allow consistent dividends to be paid on a regular quarterly basis, the Board intends to continue to pay all dividends as
interim dividends. The Company does not therefore announce a final dividend. The Board believes this policy remains appropriate to the Group’s
circumstances and is in the best interests of shareholders.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic ReportDirectors’ Report
(continued)

Directors
Biographical details of the Directors, all of whom are non-executive, can be found on page 37. As explained in more detail under the Corporate
Governance Statement on pages 43 and 44, all new appointments by the Board are subject to election by shareholders at the next AGM thereafter
the Board has agreed that all Directors will retire annually and, if appropriate, seek re-election. Accordingly, all Directors except Mr Ross will
be subject to re-election at the AGM on 10 November 2016. Having considered the knowledge and experience of each Director standing for
re-election the Board has no hesitation in recommending their re-election to shareholders.

Mr Ross intends to retire from the Board immediately following the conclusion of the AGM on 10 November 2016 and will therefore not be standing
for re-election. In order to ensure that the Board continues to have the necessary range of skills and expertise, and fulfil the requirement of the
Company to have two Jersey-based Directors, the Board intends to appoint an additional Jersey-resident Director with effect from 10 November
2016 subject to the receipt of the necessary JFSC approval. Such Director will then be subject to election by shareholders at the AGM to be held
in 2017. The Company does not expect to employ, or pay any remuneration to, any external recruitment consultant in relation to this appointment.

The Directors believe that the Board has an appropriate balance of skills, experience, independence and knowledge of the Group to enable
it to provide effective strategic leadership and proper guidance of the Group. The Board confirms that, following the evaluation process set
out in the Corporate Governance Statement on page 44, the performance of each of the Directors continues to be effective and demonstrates
commitment to the role. There are no service contracts in existence between the Company and any Directors but each of the Directors has been
issued with, and accepted, the terms of a letter of appointment that sets out the main terms of his or her appointment. Amongst other things, the
letter includes confirmation that the Directors have a sufficient understanding of the Group and the sector in which it operates, and sufficient time
available to discharge their duties effectively taking into account their other commitments. These letters are available for inspection upon request
at the Company’s registered office.

Substantial Interests in Share Capital
As at 30 June 2016 the Company had received notification of the following holdings of voting rights (under the Financial Conduct Authority’s
Disclosure Guidelines and Transparency Rules):

Investec Wealth & Investment Limited
CCLA Investment Management Limited
Blackrock, Inc
Two Sigma Holdings VC Acquisition Vehicle II, LLC
Rathbone Brothers plc
Alder Investment Management Limited
Premier Fund Managers Limited
Henderson Global Investors Limited

* Based on 252,180,851 Ordinary Shares in issue as at 30 June 2016.

Number of
Ordinary
Shares held

23,385,150
10,616,222
9,435,473
7,000,000
6,801,183
6,375,044
5,075,000
4,500,000

Percentage
held*

9.3
4.2
3.7
2.8
2.7
2.5
2.0
1.8

There have been no changes notified to the Company in respect of the above holdings, and no new holdings notified, since 30 June 2016.

Going concern
In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council.
They have considered the current cash position of the Group, forecast rental income and other forecast cash flows. The Group has agreements
relating to its borrowing facilities with which it has complied during the year. Based on this information the Directors believe that the Group has the
ability to meet its financial obligations as they fall due for a period of at least twelve months from the date of approval of the financial statements.
For this reason, the Board continue to adopt the going concern basis in preparing the financial statements.

Resolutions to be proposed at the AGM
Resolutions 1 to 8 are self-explanatory.

Authority to issue shares on a non-pre-emptive basis
In accordance with the provisions of the Company’s articles of association and the Listing Rules, the directors of an overseas premium listed company
are not permitted to allot new shares (or grant rights over shares) for cash without first offering them to existing shareholders in proportion to their
existing holdings. Resolution 9 which is a special resolution therefore seeks to provide the Directors with the authority to issue shares or sell shares
held in treasury on a non-pre-emptive basis for cash (i.e. without first offering such shares to existing shareholders pro-rata to their existing holdings)
up to an amount of 25,218,085 shares (representing 10 per cent of the issued ordinary share capital of the Company as at 28 September 2016).

This authority will expire at the conclusion of the next annual general meeting of the Company after the passing of this resolution or on the expiry
of 15 months from the passing of this resolution, unless it is previously renewed, varied or revoked. It is expected that the Company will seek this
authority on an annual basis.

This authority will only be used to issue shares at a premium to net asset value and only when the Directors believe that it would be in the best
interests of the Company to do so.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceAuthority to make market purchases of ordinary shares
Given the Company is currently in an investment phase, it is unlikely in the short term that the Directors will buy back any of the ordinary shares currently
in issue. Thereafter any of the buy back of ordinary shares will be subject to the Companies (Jersey) Law 1991 (as amended), the Listing Rules and
within guidelines established by the Board from time to time (which take into account the income and cashflow requirements of the Company).

Resolution 10 will be proposed as a special resolution and seeks to provide the Directors with the authority to purchase up to 37,801,909 ordinary
shares or, if less, the number representing approximately 14.99 per cent of the Company’s ordinary shares in issue at the date of the passing of
resolution 10. Any shares purchased shall either be cancelled or held in treasury.

This authority will expire at the conclusion of the next annual general meeting of the Company after the passing of this resolution unless it is
previously renewed, varied or revoked.

Directors’ remuneration reports
The Directors’ remuneration policy and annual report, which can be found on pages 50 and 51, provides detailed information on the remuneration
arrangements for Directors of the Company. Included is the Directors’ Remuneration Policy which shareholders approved at the AGM in November
2014 and will again be put to shareholders at the AGM in 2017. Shareholders will be asked to approve the Directors’ Annual Report on Remuneration
(resolution 2).

Auditor
The Independent Auditor’s Report can be found on pages 52 to 55. Ernst & Young LLP (‘EY’) has indicated its willingness to continue in office
and a resolution will be proposed at the Annual General Meeting to re-appoint EY as the Auditor and for the Directors to determine their remuneration
(resolution 8).

On behalf of the Board

Mr Malcolm Naish
Chairman
28 September 2016

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

The Board has conducted this review over a five year time horizon, which is a period thought to be appropriate for a company investing
in UK care homes with a long-term investment outlook. At each Board Meeting, the Directors consider a detailed financial model covering
a similar five year rolling period, as this is considered the maximum timescale over which the performance of the Group can be forecast
with a reasonable degree of accuracy. The Group has a property portfolio at 30 June 2016 which has long leases and a weighted average
unexpired lease term of 28.6 years and borrowings of £21.0 million on which the interest rate has been fixed at 2.85 per cent per annum
through the use of an interest rate swap. At 30 June 2016, these borrowings were committed to 23 June 2019, within the five year time
horizon, however, since the year end the loan facility has been extended to 1 September 2021 (see page 30), and the borrowing margin
has decreased.

The Director’s assessment of the Group’s principal risks are highlighted on pages 14 and 15. The most significant risks identified as
relevant to the viability statement were those relating to:

– Rental income. The risks are that a fall in rental income could impact the level of income received, the capital value of the property

portfolio, the Group’s cash resources and compliance with its financial covenants, and

– Funding. The risks are that the Group is unable to meet future financial commitments or that there is an increase in the Group’s costs

and/or ability to comply with its financial covenants through interest rate fluctuations.

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

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

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic ReportStatement of Directors’ Responsibilities

The Directors are responsible for preparing the Annual Report and Financial Statements, in accordance with applicable Jersey law and International
Financial Reporting Standards (‘IFRS’) as adopted by the EU.

Jersey law requires the Directors to prepare, in accordance with generally accepted accounting principles, financial statements for each financial
period which give a true and fair view of the state of affairs of the Group and of the profit and loss of the Group for that period. In addition the
Directors must not approve the financial statements unless they are satisfied that they present a fair, balanced and understandable report and
provide the information necessary for shareholders to assess the Group’s performance, business model and strategy.

Under Jersey law they have elected to prepare the financial statements in accordance with IFRS as adopted by the EU. In preparing these
financial statements, the Directors are required to:

– select suitable accounting policies and then apply them consistently;
– make judgements and estimates that are reasonable;
– state whether applicable International Financial Reporting Standards have been followed, subject to any material departures disclosed and

explained in the financial statements; and

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

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Group’s transactions and disclose
with reasonable accuracy at any time the financial position of the Group and enable them to ensure that its financial statements comply with the
Companies (Jersey) Law 1991 (as amended). They are responsible for taking such steps as are reasonably open to them to safeguard the assets
of the Group and to prevent and detect fraud and other irregularities.

Under applicable regulations, the Directors are also responsible for preparing a Statement of Corporate Governance that complies with those
regulations.

The Directors confirm that to the best of their knowledge:

– the financial statements, prepared in accordance with the applicable IFRS as adopted by the EU, give a true and fair view of the assets, liabilities,

financial position and profit of the Group;

– the Annual Report and Financial Statements taken as a whole, is fair, balanced and understandable and it provides the information necessary

to assess the Group’s position and performance, business model and strategy; and

– the Strategic Report includes a fair review of the development and performance of the business and the position of the Group, together with

a description of the principal risks and uncertainties that the Group faces.

On behalf of the Board

Mr Malcolm Naish
Chairman
28 September 2016

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceCorporate Governance Statement

Introduction
The Board has considered the principles set out in the UK Corporate Governance Code (‘the UK Code’) and the AIC Code of Corporate Governance
(the ‘AIC Code’)*. The Company is a member of the AIC. The Board believes that during the period under review the Company has complied with the
provisions of the UK Code, in so far as they relate to the Company’s business. The Board is also adhering to the principles and recommendations of
the AIC Code.

The Board
The Board is responsible for the effective stewardship of the Company’s affairs and reviews the schedule of matters reserved for its decision, which
are categorised under various headings. These include investment strategy, investment policy, finance, risk, investment restrictions, performance,
marketing, adviser appointments and the constitution of the Board. It has responsibility for all corporate strategic issues, dividend policy, share
buyback policy and corporate governance matters which are all reviewed regularly. The Board as a whole is responsible for authorising all purchases
and sales within the Group’s portfolio and for reviewing the quarterly independent property valuation reports produced by Colliers International
Property Consultants.

In order to enable them to discharge their responsibilities, all Directors have full and timely access to relevant information. At each meeting the
Board reviews the Company’s investment performance and considers financial analyses and other reports of an operational nature. The Board
monitors compliance with the Company’s objectives and is responsible for setting investment and gearing limits within which the Investment
Manager has discretion to act, and thus supervises the management of the investment portfolio which is contractually delegated to the
Investment Manager.

The table on page 44 sets out the number of scheduled Board and Committee meetings held during the year and the number of meetings
attended by each Director. The Board held a strategy meeting in October 2015 to consider strategic issues. In addition to these scheduled
meetings, there were a further 16 Board Committee meetings held during the year.

Each of the above Directors has signed a letter of appointment with the Company which in all cases other than for Mrs Jones and Mr Ross
includes twelve months’ notice of termination by either party. Mrs Jones’ and Mr Ross’ letters of appointment include no notice period on
termination by either party. These are available for inspection at the Company’s registered office during normal business hours and are also
available at annual general meetings.

Individual Directors may, at the expense of the Company, seek independent professional advice on any matter that concerns them in the furtherance
of their duties. The Company maintains appropriate directors’ and officers’ liability insurance. The Board has direct access to company secretarial
advice and services. The Company Secretary is responsible for ensuring that Board and Committee procedures are followed and applicable
regulations are complied with.

Investment management
Target provides investment management and other services to the Group. Details of the arrangements between the Group and the Investment
Manager in respect of management services are provided in the financial statements. The Board keeps the appropriateness of the Investment
Manager’s appointment under review. In doing so the Board reviews performance quarterly and considers the past investment performance of
the Group and the capability and resources of the Investment Manager to deliver satisfactory investment performance in the future. It also reviews
the length of the notice period of the investment management agreement and the fees payable to the Investment Manager, together with the
standard of the other services provided. Following such review, the Board concluded that the term of the Investment Management Agreement
be amended such that it could be terminated by either party on 12 months’ written notice provided that such notice shall not expire earlier than
30 September 2019. Should the Company terminate the Investment Management Agreement earlier than 30 September 2019 then compensation
in lieu of notice will be payable to the Investment Manager.

The Directors are satisfied with the Investment Manager’s ability to deliver satisfactory investment performance and the quality of other services
provided. It is therefore their opinion that the continuing appointment of the Investment Manager on the terms agreed is in the interests of
shareholders as a whole.

Appointments, diversity and succession planning
Directors may be appointed by the Company by ordinary resolution or by the Board. All new appointments by the Board are subject to election
by shareholders at the next AGM following their appointment. The Company’s Articles of Incorporation require all Directors to retire by rotation at
least every three years. However, in accordance with the recommendations of the AIC Code and the UK Corporate Governance Code the Board
has agreed that all Directors will retire annually and, if appropriate, seek re-election.

The Board believes in the benefits of having a diverse range of skills and backgrounds, including gender and length of service, on its Board
of Directors. All appointments will continue to be based on merit and therefore the Board is unwilling to commit to numerical diversity targets.
The Board’s policy on tenure is that continuity and experience are considered to add significantly to the strength of the Board and, as such,
no limit on the overall length of service of any of the Company’s Directors, including the Chairman, has been imposed.

* Copies of both codes may be found on the respective websites: www.frc.org.uk and www.theaic.co.uk

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic ReportCorporate Governance Statement
(continued)

Appointments, diversity and succession planning (continued)

Mr Naish
Professor Andrews
Mr Coull
Mr Hutchison
Mrs Jones
Mr Ross

Board

Audit Committee

Management Engagement Committee

Nomination Committee

Held

Attended

Held

Attended

Held

Attended

Held

Attended

5
5
5
5
5
5

5
4
5
5
5
4

3
3
3
3
3
3

3
2
3
3
3
3

1
1
1
1
1
1

1
–
1
1
1
1

1
1
1
1
1
1

1
–
1
1
1
1

Removal of Directors
The Company may by special resolution remove any Director before the expiration of his or her period of office and may by ordinary resolution
appoint another person who is willing to act to be a Director in his or her place.

Independence of Directors
The Board, which is composed solely of independent non-executive Directors, regularly reviews the independence of its members. Mr Hutchison
performs the role of Senior Independent Director. All the Directors have been assessed by the Board as remaining independent of the Investment
Manager and of the Company itself; none has a past or current connection with the Investment Manager and each remains independent in character
and judgement with no relationships or circumstances relating to the Company that are likely to affect that judgement.

The basis on which the Company aims to generate value over the longer term is set out in its objective and investment policy as contained on
page 39. A management agreement between the Company and Target sets out the matters over which the Investment Manager has authority
and the limits beyond which Board approval must be sought. All other matters, including investment and dividend policies, corporate strategy,
gearing, corporate governance procedures and risk management, are reserved for the approval of the Board of Directors.

The Board meets at least quarterly and receives full information on the Group’s investment performance, assets, liabilities and other relevant
information in advance of Board meetings. Throughout the year a number of committees have been in place. The committees operate within
clearly defined terms of reference which are available on request or for inspection at the Company’s registered office during normal business hours.

Audit Committee
The Board has established an Audit Committee, the role and responsibilities of which are set out in the report on page 46.

Management Engagement Committee
The Board has established a Management Engagement Committee. The Management Engagement Committee comprises all the Directors and
is chaired by Mr Naish. The Committee reviews the appropriateness of the Investment Manager’s continuing appointment together with the terms
and conditions thereof on a regular basis. It also reviews the terms and quality of service received from other service providers on a regular basis.

Nomination Committee
The Board has established a Nomination Committee which comprises all the Directors and is chaired by Mr Naish. The Board considers that,
given its size, it would be unnecessarily burdensome to establish a separate nomination committee which did not include the entire Board and
believes that this enables all Directors to be kept fully informed of any issues that arise. The Nomination Committee is responsible for reviewing
the size, structure and skills of the Board and considering whether any changes are required or new appointments are necessary to meet the
requirements of the Company’s business or to maintain a balanced Board. During the year the performance of the Board, Committees and individual
Directors was evaluated through an assessment process led by the Chairman. This process involved the completion of questionnaires tailored
to suit the nature of the Company, discussions with individual Directors and individual feedback from the Chairman to each of the Directors. The
evaluation of the Chairman was led by the Senior Independent Director in consultation with all the other Directors. Subsequent to the year end,
as discussed on page 40, the Nomination Committee considered whether any new appointments were required given the forthcoming retirement
of Mr Ross. After review, the Nomination Committee considered that, following the retirement of Mr Ross, the appointment of an additional
Jersey-based Director with similar skills, knowledge and experience would ensure that a balanced Board was retained and recommended
such appointment be made as soon as possible after the AGM at which Mr Ross was due to retire, subject to the necessary JFSC approvals having
been obtained.

Whenever there are new appointments, these Directors receive an induction from the Investment Manager and Company Secretary on joining
the Board. All Directors receive other relevant training, collectively or individually, as necessary.

All of the Nomination Committee’s responsibilities have been carried out over the period of review.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceRelations with shareholders
The Company proactively seeks the views of its shareholders and places great importance on communication with them. The Board receives
regular reports from the Investment Manager and Broker on the views of shareholders, and the Chairman and other Directors make themselves
available to meet shareholders when required to discuss any significant issues that have arisen and address shareholder concerns and queries.
The Notice of Annual General Meeting to be held on 10 November 2016 is set out on pages 58 and 59. It is hoped that this will provide a forum,
both formal and informal, for shareholders to meet and discuss issues with the Directors and the Investment Manager. The Annual Report and
Notice of Annual General Meeting are posted to shareholders at least 21 clear days before the Annual General Meeting.

Environmental, Social and Human Rights Issues
The Company has no employees and therefore no disclosures are required to be made in respect of employees.

The Company has no greenhouse gas emissions to report nor does it have responsibility for any other emissions producing sources.

On behalf of the Board

Mr Malcolm Naish
Chairman
28 September 2016

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic ReportReport of the Audit Committee

Composition of the Audit Committee
An Audit Committee comprised of all of the Directors and chaired by Mr Coull has been established with written terms of reference which are
reviewed at each meeting and are available on request.

Role of the Audit Committee
The Committee’s responsibilities are shown in the table below together with a description of how they have been discharged. More detailed
information on certain aspects of the Committee’s work is given in the subsequent text.

Responsibilities of the Audit Committee

How they have been discharged

Consideration of the half-year and annual financial statements, the
appropriateness of the accounting policies applied and any financial
reporting judgements and key assumptions.

Evaluation of the effectiveness of the risk management and internal
control procedures.

Assessment of the prospects of the Company, taking account of the
Company’s position and principal risks, and consideration of the
period of time over which such evaluation can be made.

Consideration of the narrative elements of the annual financial report,
including whether the annual financial report taken as a whole is fair,
balanced and understandable and provides the necessary information
for shareholders to assess the Group’s business model, strategy
and performance.

Evaluation of reports received from the Auditor with respect to the
annual financial statements.

Monitoring developments in accounting and reporting requirements
that impact on the Group’s compliance with relevant statutory and
listing requirements.

Management of the relationship with the external Auditor, including
their appointment and the evaluation of scope, effectiveness,
independence and objectivity of their audit.

The Committee has met twice during the year and has reviewed
the contents of the half-yearly and annual reports. The Investment
Manager, Administrator and Auditor attended both meetings.
Significant matters considered by the Group are listed on page 48.

The Investment Manager maintains a risk matrix which summarises
the Group’s key risks and an internal control matrix which shows the
Group’s key controls over its principal financial systems (including the
relevant procedures operated by the Administrator). The Committee
also appointed a reporting accountant to review and report on the
operation of certain internal controls in place within the Investment
Manager. From a review of the matrices, a review of the outcome of
the procedures undertaken by the reporting accountant, a review of
regular management information and discussion with the Investment
Manager the Committee has satisfied itself on the effectiveness of the
risk and control procedures.

The Committee has reviewed the assessment described in more
detail under the section ‘Viability Statement’ within the Directors’
Report, and the underlying data on which such assessment is based,
to ensure that the work undertaken, the conclusions reached and the
disclosures included within the Annual Report are appropriate.

The Committee has reviewed the content and presentation of the
annual financial report and discussed how well it achieves the three
criteria opposite.

The Auditor’s planning report and related timetable were discussed
with the Auditor in advance of work commencing, together with the
areas of audit focus. At the conclusion of the audit the Committee
discussed the audit results report with the Auditor, Administrator
and Investment Manager.

The Company ensures through its Legal Adviser, Administrator,
Investment Manager and Auditor, that any developments impacting
on its responsibilities are tabled for discussion at Committee or Board
meetings. Other than the changes to the UK Code of Corporate
Governance, of which one significant requirement is the Viability
Statement detailed on page 41, there were no significant
developments that became effective during the year to 30 June 2016.

The Auditor attended the meeting of the Committee at which the
Company’s year end accounts were reviewed and also met separately
with the chairman of the Committee on two occasions, to discuss
the findings of their interim review, the audit plan for the year and the
findings of their annual audit. The scope of the audit was discussed
at the planning stage along with the staffing and timing of audit
procedures to ensure that an effective audit could be undertaken.
The Committee has also reviewed the independence and objectivity
of the Auditor and has considered the effectiveness of the audit.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceRisk management and internal controls
Risks
The principal risks faced by the Group together with the procedures employed to manage them are described in the Strategic Report on pages
14 and 15.

Internal controls
The Board is responsible for the internal financial control systems of the Group and for reviewing their effectiveness. It has contractually delegated
to external agencies the services the Group requires, but the Directors are fully informed of the internal control framework established by the
Investment Manager and the Administrator to provide reasonable assurance on the effectiveness of internal financial control in the following areas:

– income flows, including rental income;
– expenditure, including operating and finance costs;
– capital expenditure, including pre-acquisition diligence and authorisation procedures;
– dividend payments, including the calculation of Property Income Distributions;
– data security;
– the maintenance of proper accounting records; and
– the reliability of the financial information upon which business decisions are made and which is used for publication, whether to report Net

Asset Values or used as the basis for the annual report.

As the Group has evolved, the Investment Manager has developed a system of internal controls covering the processes listed above which it has
subsequently presented in the form of a controls matrix and which it has discussed with the Committee. As referred to above, in relation to the
year ended 30 June 2016, the Group engaged a reporting accountant to undertake a review and report on the operation of certain of these
internal controls. No issues were noted.

Committee members receive and consider quarterly reports from the Investment Manager, giving full details of the portfolio and all transactions
and of all aspects of the financial position of the Group. Additional ad hoc reports are received as required and Directors have access at all times
to the advice and services of the Company Secretary, which is responsible to the Board for ensuring that Board procedures are followed and that
applicable rules and regulations are complied with.

The Investment Manager reports in writing to the Board on operations and compliance issues prior to each meeting, and otherwise as necessary.
The Investment Manager reports directly to the Audit Committee concerning the internal controls applicable to the Investment Manager’s investment
and general office procedures.

In addition, the Board keeps under its own direct control, through the Investment and Property Valuation Committee, all property transactions.
The Board also retains direct control over any decisions regarding the Group’s long-term borrowings.

The review procedures detailed above have been in place throughout the year and up to the date of this report and the Board is satisfied with
their effectiveness and that they are in accordance with the guidance in the Financial Reporting Council’s ‘Guidance on Risk Management,
Internal Control and Related Financial and Business Reporting’ in so far as applicable given the Company’s size and structure. There were no
significant weaknesses or failings to report. The procedures are designed to manage rather than eliminate risk and, by their nature, can only
provide reasonable, but not absolute, assurance against material misstatement or loss.

The Board has reviewed the need for an internal audit function. It has decided that the systems and procedures employed by the Investment
Manager and the Administrator, and the work carried out by the Group’s Reporting Accountant, provide sufficient assurance that a sound system
of internal control, which safeguards the Group’s assets, is maintained. An internal audit function specific to the Group is therefore considered
unnecessary.

The Auditor
As part of the review of auditor independence and effectiveness, EY has confirmed that they are independent of the Group and have complied
with relevant auditing standards. In evaluating EY’s performance, the Audit Committee has taken into consideration the standing, skills and
experience of the firm and of the audit team.

The Committee assessed the effectiveness of the audit process through the quality of the formal reports it received from EY at the planning and
conclusion of the audit, together with the contribution which EY made to the discussion of any matters raised in these reports or by Committee
members. The Committee also took into account any relevant observations made by the Investment Manager and the Administrator. The Committee
is satisfied that EY provides an effective independent challenge in carrying out its responsibilities.

EY have been the auditors to the Group since its launch in 2013. Following professional guidelines, the audit principal rotates after five years.
The current audit principal is in the third year of her appointment. On this basis and having considered the effectiveness of the audit the Audit
Committee has recommended the continuing appointment of EY to the Board. EY’s performance will continue to be reviewed annually taking
into account all relevant guidance and best practice.

In relation to the provision of non-audit services by the auditor, it has been agreed that all non-audit work to be carried out by the auditor
must be approved in advance by the Audit Committee and any special projects must also be approved in advance so as not to endanger
the independence of EY as auditor. In this respect it considers that the provision of the non-audit services shown in the table on the following
page do not constitute such a threat.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic ReportReport of the Audit Committee
(continued)

The Auditor (continued)

Service provided

Statutory audit
Review of interim financial information
Tax compliance and advice
Assurance on accounting and tax information in prospectuses

Total

Fee (£’000)

88
6
–
41

135

During the year ended 30 June 2016, being cognisant of the regulations that would shortly take effect restricting the ability of the auditors to
provide certain tax services, the Board decided to appoint Deloitte LLP as the main tax adviser to the Group, replacing Ernst & Young LLP
who had provided such services in prior years.

Annual Report and Financial Statements
The Board of Directors is responsible for preparing the Annual Report and financial statements. The Audit Committee advises the Board on the
form and content of the Annual Report and financial statements, any issues which may arise and any specific areas which require judgement.
The Audit Committee considered certain significant issues during the year. These are noted in the table below.

Matter

Audit Committee action

Valuation and ownership of the investment property portfolio
The Group’s property portfolio accounted for 71.0 per cent of its total
assets as at 30 June 2016. Although valued by an independent firm of
valuers, Colliers International Property Consultants Limited (‘Colliers’),
the valuation of the investment property portfolio is inherently subjective,
requiring significant judgement by the valuers. Errors in the valuation
could have a material impact on the Group’s net asset value. Further
information about the property portfolio and inputs to the valuations
are set out in note 9 to the financial statements.

The Investment Manager liaises with the valuers on a regular basis and
meets with them prior to the production of each quarterly valuation.
The Audit Committee reviewed the results of the valuation process
throughout the year and discussed the detail of each of the quarterly
valuations with the Investment Manager. Members of the Committee
had the opportunity to discuss the valuation as at 30 June 2016 with
Colliers to ensure that they understood the assumptions underlying
the valuation and the sensitivities inherent in the valuation and any
significant area of judgement.

Income recognition
Incomplete or inaccurate income recognition could have an adverse
effect on the Group’s net asset value, earnings per share, its level of
dividend cover and compliance with REIT regulations.

The Committee also discussed with the Auditor the work performed to
confirm the valuation and ownership of the properties in the portfolio.

The Audit Committee reviewed the Investment Manager’s processes
and controls around the recording of investment income. It also
compared the final level of income received for the year to forecasts.
Particular attention was paid to any variable income recognised, such
as that arising on leases where the rental level paid may be partially
based on the earnings of the underlying tenant operator.

The Audit Committee assessed the appropriateness of the accounting
treatment of the fixed rental uplifts and other lease incentives and how
this impacted the Property Income component of dividends paid or
payable by the Company.

Calculation and payment of management and performance fees
Incorrect interpretation of the relevant provisions in the Investment
Management Agreement (‘IMA’) and/or incorrect calculation of
the fees payable to the Investment Manager could result in an
error in the financial statements and an incorrect payment to the
Investment Manager.

The Committee has discussed the provisions in the IMA relating to
both components of the fee and the controls over fee payments. It has
also reviewed in detail the period end estimate for the performance
fee accrued in the financial statements and satisfied itself that the
underlying calculations and assumptions which lie behind it are in
accordance with the IMA, as is the proposed timing of payment.

Internal Controls
Incomplete design or ineffective operation of internal controls may
result in a loss of the Group’s assets, a misstatement of the financial
statements or a breach of legal, tax or other regulations.

The Audit Committee reviewed the Group’s internal control
environment, considering its completeness and efficiency and
identifying any areas where the Board, or Committees, did not have
direct means of ensuring that the internal controls in place within
the Investment Manager were operating as designed. An external
Reporting Accountant was appointed to complete agreed-upon-
procedures over the operation of these controls and they reported
their findings directly to the Audit Committee. There were no material
control deficiencies or weaknesses identified through this review.

The Audit Committee considered the unadjusted errors reported by the Auditors and concluded that, both individually and cumulatively, these errors
did not indicate any systemic weaknesses in the Group’s internal controls or financial reporting processes and that no adjustments were required to
the financial statements as presented.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceConclusion with respect to the Annual Report and Financial Statements
The Audit Committee has concluded that the report and financial statements for the year ended 30 June 2016, taken as a whole, is fair, balanced
and understandable and provides the information necessary for shareholders to assess the Group’s business model, strategy and performance.

The Audit Committee has reported its conclusions to the Board of Directors. The Audit Committee reached this conclusion through a process
of review of the document, discussion, and enquiries of the various parties involved in the preparation of the report and financial statements.

Mr Gordon Coull
Chairman of the Audit Committee
28 September 2016

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic ReportDirectors’ Remuneration Report

The Board comprises only independent non-executive Directors. The Company has no executive Directors or employees. For these reasons,
it is not considered appropriate to have a separate Remuneration Committee. The full Board determines the level of Directors’ fees.

Directors’ Fees
Full details of the Group’s policy with regards to Directors’ fees and fees paid during the year ended 30 June 2016 are shown below. The level
of Directors’ fees was last increased with effect from 1 July 2014, with the size of the Company having increased significantly since that date
resulting in a commensurate increase in the responsibilities and time commitment required of the Directors. Therefore, the Board concluded after
detailed review that, in line with the policy set out below and considering the level of Directors’ fees paid by the Company’s peers, the level of
Directors’ fees should be increased to the following with effect from 1 July 2016: Mr Naish, the Chairman, £40,000 per annum (previously £30,000
per annum), Mr Coull, the Audit Committee Chairman, £35,000 per annum (previously £25,000 per annum), £30,000 per annum (previously
£20,000 per annum) to each of Professor Andrews and Mr Hutchison. Mrs Jones and the Director appointed to replace Mr Ross will each receive
a fee of £15,000 per annum (previously £10,000 per annum).

The remuneration policy, which was approved by shareholders at the Company’s AGM in November 2014, with 100.0 per cent of votes cast being
in favour, will again be put to shareholders at the AGM in 2017.

The Board considers the level of Directors’ fees at least annually.

The Board has not received any direct communications from the Company’s Shareholders in respect of the levels of Directors’ remuneration.

Remuneration policy
The Group’s policy is that the remuneration of the Directors should reflect the experience of the Board as a whole, the time commitment required,
and be fair and comparable with that of other similar companies. Furthermore, the level of remuneration should be sufficient to attract and retain
the Directors needed to oversee the Group properly and to reflect its specific circumstances. There were no changes to the policy during the year
and it is intended that this policy will continue to apply for the year ending 30 June 2017.

The fees for the Directors are determined within the limit set out in the Company’s Articles of Incorporation. The present limit is an aggregate of
£200,000 per annum and may not be changed without seeking shareholder approval at a general meeting. The fees are fixed and are payable in
cash, quarterly in arrears. Directors are not eligible for bonuses, pension benefits, share options, long-term incentive schemes or other benefits.

It is the Board’s policy that Directors do not have service contracts, but each new Director is provided with a letter of appointment. The Directors’
letters of appointment are available on request at the Company’s registered office during business hours and will be available for 15 minutes prior
to and during the forthcoming Annual General Meeting. The terms of Directors’ appointments provide that Directors should retire and be subject
to re-election at the first Annual General Meeting after their appointment and in accordance with the recommendations of the UK Corporate
Governance Code, the Board has agreed that all Directors will retire annually.

Annual Report on Directors’ Remuneration
Directors’ emoluments for the year
The Directors who served during the year received the following emoluments in the form of fees:

Mr Naish (Chairman)
Mr Coull (Audit Committee Chairman)
Professor Andrews
Mr Hutchison
Mrs Jones*
Mr Ross*

Total

Appointed 22 July 2014.

Year ended
30 June 2016
£’000

Year ended
30 June 2015
£’000

30
25
20
20
10
10

115

30
25
20
20
9
9

113

Relative importance of spend on pay
As the Company has no employees, no table can be presented which compares remuneration paid to employees with distribution to shareholders.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceDirectors’ shareholdings
The Directors who held office at the year-end and their interests (all beneficial) in the ordinary shares of the Company as at 30 June 2016 and as
at 28 September 2016 were as follows:

Mr Naish
Professor Andrews
Mr Coull
Mr Hutchison
Mrs Jones
Mr Ross

Total

Ordinary shares
28 September
2016

Ordinary shares
30 June
2016

40,000
–
30,000
70,000
–
–

140,000

Group performance
The Board is responsible for the Group’s investment strategy and performance, although the management of the Group’s investment portfolio
is delegated to the Investment Manager through the investment management agreement, as referred to on page 38.

The graph below compares, from launch to 30 June 2016, the share price total return (assuming all dividends are reinvested) to ordinary
shareholders compared to the NAV total return.

135

130

125

120

115

110

105

100

n
r
u
t
e
r

a
t
o
t

x
e
d
n

07/03/13

31/03/13

30/06/13

30/09/13

31/12/13

31/03/14

30/06/14

30/09/14

31/12/14

31/03/15

30/06/15

30/09/15

31/12/15

31/03/16

30/06/16

Share price total return

NAV total return

Source: R&H Fund Services Limited

Voting at Annual General Meeting
At the Company’s last AGM, held on 12 November 2015, shareholders approved the Directors’ Remuneration Report in respect of the year ended
30 June 2015. 100.0 per cent of the votes cast were in favour of the resolution.

An ordinary resolution for the approval of this Annual Report on Directors’ Remuneration will be put to shareholders at the forthcoming Annual
General Meeting.

On behalf of the Board

Mr Malcolm Naish
Chairman
28 September 2016

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic Report

Independent Auditor’s Report
To the Members of Target Healthcare REIT Limited

Our opinion on the financial statements
In our opinion:

– the financial statements give a true and fair view of the state of the Group’s affairs as at 30 June 2016 and of its profit for the year then ended;
– the financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the

European Union; and

– the financial statements have been prepared in accordance with the requirements of the Companies (Jersey) Law 1991.

What we have audited
Target Healthcare REIT Limited’s financial statements comprise the:

– Consolidated Statement of Comprehensive Income for the year ended 30 June 2016
– Consolidated Statement of Financial Position as at 30 June 2016
– Consolidated Statement of Changes in Equity for the year ended 30 June 2016
– Consolidated Statement of Cash Flows for the year ended 30 June 2016
– Related notes 1 to 23 to the financial statements

The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as
adopted by the European Union.

Overview of our audit approach

Risks of material misstatement

– Incomplete or inaccurate recognition of rental income.
– Incorrect valuation of investment properties.
– Incorrect calculation of performance fees or misinterpretation of the documented

methodology.

Audit scope

– We performed an audit of the complete financial information of the Group including all

the subsidiaries.

– The subsidiaries where we performed full or specific audit procedures accounted for 100%

of Profit before tax, Revenue and Total assets.

Materiality

– Overall Group materiality is £2.5m which represents 1% net assets.

Our assessment of risk of material misstatement
We identified the risks of material misstatement described below as those that had the greatest effect on our overall audit strategy, the allocation of
resources in the audit and the direction of the efforts of the audit team. In addressing these risks, we have performed the procedures below which
were designed in the context of the financial statements as a whole and, consequently, we do not express any opinion on these individual areas.

Risk

Our response to the risk

What we reported to the Audit Committee

Incomplete or inaccurate recognition
of rental income (as described on page 48
in the Report of the Audit Committee).

Revenue is earned in the form of rental
income from the investment properties
and is recognised on an accrual basis. The
lease agreements tend to have durations of
multiple years and minimum and maximum
fixed annual rental increase clauses. IAS 17
‘Leases’ requires that income or expenditure
on an operating lease is adjusted to ensure
that the total value of the lease is spread
evenly over the term of the lease.

During the year ended 30 June 2016, £16.81m
has been recognised as rental income. Of this
£12.68 million has been recorded as revenue in
the consolidated statement of comprehensive
income and £4.13m as capital relating to fixed
rental uplifts which are being spread over the
applicable lease term.

We have performed the following procedures:

The results of our procedures are:

Reviewed the Group’s accounting policies in
respect of revenue recognition to ensure they
have been consistently applied throughout the
year and are in accordance with applicable
accounting standards.

Agreed the rental rates to tenancy agreements
and recalculated the rental income recognised
in the Group consolidated financial statements.

Performed a review of the tenancy agreements
to ensure that all relevant clauses and covenants
have been reflected in recognising rental income
in the Group’s consolidated financial statements.

Re-calculated the rental adjustments required
for fixed rental uplifts for all applicable tenants
and considered the allocation between
revenue and capital.

We noted no issues in our review of the
Group’s accounting policies in respect to
revenue recognition.

We noted no issues when agreeing the
rental rates to tenancy agreements or in
our recalculation of the rental income.

We noted no issues in our review of the
tenancy agreements and ensured that all
relevant clauses and covenants have been
reflected in recognising rental income in the
Group’s consolidated financial statements.

We noted no issues with the rental adjustment
calculations for fixed rental uplifts under IAS 17
and we are satisfied that the capital and
revenue allocation is appropriate.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceRisk

Our response to the risk

What we reported to the Audit Committee

Incorrect valuation of investment
properties (as described on page 48
in the Report of the Audit Committee).

At 30 June 2016, the Group’s investment
portfolio consists of UK healthcare properties,
with a market value of £210.67m and carrying
value of £200.72m, which is net of a deduction
of £9.95m for the straight lining of fixed rent
review uplifts.

The properties are valued externally on behalf
of the Group by Colliers International Property
Consultants Limited (‘Colliers’) and recorded
in the consolidated financial statements at
their carrying value, being the Colliers market
valuation adjusted for the impact of the rental
uplift adjustments required by IAS 17.

We performed the following procedures:

The results of our procedures are:

Agreed the value of all properties held at the
year end to the open market valuations included
in the valuation report provided by Colliers as
adjusted for the impact of the rental uplift.

We noted no issues when agreeing the value
of all properties held at the year end to the open
market valuations included in the valuation
report provided by Colliers as adjusted for the
impact of the rental uplift.

We noted no issues when agreeing the inputs
used by Colliers in the valuation to source data.

We noted that no significant issues were
raised in the review performed by our property
valuation specialists.

We noted no issues in relation to the
disclosures within the financial statements
regarding the assumptions made in the
valuation of properties, including the
sensitivity analysis required by IFRS 13.

Agreed a sample of inputs used by Colliers
in the valuation to source data.

Engaged our property valuation specialists
to perform a review of the property valuations
which included:

– Review of the assumptions used by

Colliers in undertaking their valuation
and an assessment of the valuation
methodology adopted;

– Discussion with Colliers which included
a high level overview of the portfolio,
covenant strength of the tenants within
the portfolio and occupancy and historic
rent cover for a sample of properties;

– A detailed review of a sample of the

individual property valuations examining key
valuation input and assumptions applied;
– A review of the full portfolio of property
valuations for any anomalies or outliers;
– An analysis of key changes in the property
valuation as a whole including a review of
the reasonableness of the income yields
for the properties; and

– Discussions with Target Advisers LLP

(the ‘Manager’) on the results and findings
of their work.

Ensured the financial statements
contain adequate disclosures regarding
the assumptions made in the valuation
of properties, including the sensitivity
analysis required under IFRS 13 ‘Fair
value measurement’.

Incorrect calculation of performance fees
or misinterpretation of the documented
methodology (as described on page 48
in the Report of the Audit Committee).

The Manager is remunerated by both a base
management fee of 0.90% of the net assets of
the Group and a performance fee, amounting
to 10% of the outperformance of the portfolio
against the IPD UK Annual Healthcare Index,
on a total return basis.

The total fee payable to the Manager is capped
at 1.25% of the average net assets for the year.

The performance fee methodology is not
overly complex however the availability of
suitable benchmark data results in an element
of estimation and judgement in the calculation
of the performance fee accrual.

We performed the following procedures:

The results of our procedures are:

Recalculated the performance fee charge and
ensured the calculations are in line with the
Investment Management Agreement (‘IMA’).

We noted no issues when recalculating the
performance fee charge and we are satisfied
that the calculations are in line with the IMA.

Agreed the key external inputs and the fee
rates used in the calculations to relevant
source data.

We noted no issues when agreeing the key
external inputs and the fee rates used in the
calculations to relevant source data.

Reviewed and challenged the approach
applied in calculating accrued performance
fees in the absence of benchmark data
covering the full period.

Reviewed the paper prepared for the Board
by the Manager setting out the basis of the
performance fee accrual for the year ended
30 June 2016 and held discussions with
the Manager and Board on any areas of
interpretation within the performance fee
calculation methodology.

We noted no issues in our review and challenge
of the approach applied in calculating accrued
performance fees.

We noted no issues in our review of the paper
prepared for the Board by the Manager or in our
discussions with the Manager and the Board.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic ReportIndependent Auditor’s Report
(continued)

The scope of our audit
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity
within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk
profile, the organisation of the Group and effectiveness of Group-wide controls, changes in the business environment and other factors relevant
for the Group.

In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of significant
accounts in the financial statements, we have included all subsidiaries of the Group in the scope of our audit.

Changes from the prior year
There are no changes in the risks reported in the prior year. Our audit covered additional components acquired during the year.

All audit work was performed directly by the audit engagement team.

Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in
forming our audit opinion.

Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic
decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.

We determined materiality for the Group to be £2.53m (2015: £1.39m), which is 1% (2015: 1%) of net assets. We derived our materiality calculation
from a proportion of total equity as this is the key measurement of the Group’s performance.

Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability
that the aggregate of uncorrected and undetected misstatements exceeds materiality.

On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that performance
materiality was 75% (2015: 75%) of our planning materiality, namely £1.90m (2015: £1.04m). We have set performance materiality at this percentage
due to our past experience of the audit that indicates a lower risk of misstatements, both corrected and uncorrected.

Audit work related to subsidiaries for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based
on a percentage of total performance materiality. The performance materiality set for each subsidiary is based on the relative scale and risk of the
subsidiary to the Group as a whole and our assessment of the risk of misstatement for that subsidiary. In the current year, the range of performance
materiality allocated to subsidiaries was £0.28m to £1.7m (2015: £0.31m to £1.0m).

Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.

We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £0.13m (2015: £0.07m), which
is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.

We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant
qualitative considerations in forming our opinion.

Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the
financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting
policies are appropriate to the group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant
accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-
financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that
is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we
become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Respective responsibilities of directors and auditor
As explained more fully in the Statement of Directors’ Responsibilities set out on page 42, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial
statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply
with the Auditing Practices Board’s Ethical Standards for Auditors.

This report is made solely to the Company’s members, as a body, in accordance with Article 113A of the Companies (Jersey) Law 1991. Our audit
work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report
and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and
the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceMatters on which we are required to report by exception

ISAs (UK and
Ireland) reporting

We are required to report to you if, in our opinion, financial and non-financial information in the
annual report is:

We have no
exceptions to report.

– materially inconsistent with the information in the audited financial statements; or
– apparently materially incorrect based on, or materially inconsistent with, our knowledge

of the Group acquired in the course of performing our audit; or

– otherwise misleading.

In particular, we are required to report whether we have identified any inconsistencies between
our knowledge acquired in the course of performing the audit and the directors’ statement
that they consider the annual report and accounts taken as a whole is fair, balanced and
understandable and provides the information necessary for shareholders to assess the entity’s
performance, business model and strategy; and whether the annual report appropriately
addresses those matters that we communicated to the audit committee that we consider should
have been disclosed.

Companies (Jersey)
Law 1991 reporting

We are required to report to you if, in our opinion:

We have no
exceptions to report.

– proper accounting records have not been kept by the company, or proper returns adequate

for our audit have not been received from branches not visited by us; or

– the company’s financial statements are not in agreement with the accounting records and

returns; or

– we have not received all the information and explanations we require for our audit.

Listing Rules review
requirements

We are required to review:

We have no
exceptions to report.

– the directors’ statement in relation to going concern, set out on page 40 and longer-term

viability, set out on page 41; and

– the part of the Corporate Governance Statement relating to the company’s compliance
with the provisions of the UK Corporate Governance Code specified for our review.

Statement on the directors’ assessment of the principal risks that would threaten the solvency or liquidity of the entity

ISAs (UK and
Ireland) reporting

We are required to give a statement as to whether we have anything material to add or to draw
attention to in relation to:

We have nothing
material to add or
to draw attention to.

– the directors’ confirmation in the annual report that they have carried out a robust

assessment of the principal risks facing the entity, including those that would threaten
its business model, future performance, solvency or liquidity;

– the disclosures in the annual report that describe those risks and explain how they are

being managed or mitigated;

– the directors’ statement in the financial statements about whether they considered it

appropriate to adopt the going concern basis of accounting in preparing them, and their
identification of any material uncertainties to the entity’s ability to continue to do so over
a period of at least twelve months from the date of approval of the financial statements; and
– the directors’ explanation in the annual report as to how they have assessed the prospects
of the entity, over what period they have done so and why they consider that period to be
appropriate, and their statement as to whether they have a reasonable expectation that the
entity will be able to continue in operation and meet its liabilities as they fall due over the
period of their assessment, including any related disclosures drawing attention to any
necessary qualifications or assumptions.

Susan Dawe
for and on behalf of Ernst & Young LLP
Edinburgh
28 September 2016

Notes:

1. The maintenance and integrity of the Target Healthcare REIT Limited web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of

these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site.

2. Legislation in Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic Report

Glossary of Terms and Definitions

Corporate Terms

AIC

AIFMD

Association of Investment Companies. This is the trade body for Closed-end Investment Companies (www.theaic.co.uk).

Alternative Investment Fund Managers Directive. Issued by the European Parliament in 2012 and 2013, the Directive requires
that all investment vehicles in the European Union, including Closed-end Investment Companies, must have appointed
a Depositary and an Alternative Investment Fund Manager. The Board of Directors of a Closed-end Investment Company,
nevertheless, remains fully responsible for all aspects of the company’s strategy, operations and compliance with regulations.

Closed-end Investment
Company

A company with a fixed issued ordinary share capital which is traded on an exchange at a price not necessarily related to the
Net Asset Value of the company and where shares can only be issued or bought back by the company in certain circumstances.
This contrasts with an open-ended investment company, which has units not traded on an exchange but issued or bought back
from investors at a price directly related to the Net Asset Value.

CQC

Depositary

Discount/Premium

Dividend

Dividend Cover

Dividend Yield

EPRA Best Practice

Care Quality Commission. The independent regulator of all health and social care services in England.

Under AIFMD rules, the Company must appoint a Depositary, whose duties in respect of investments, cash and similar assets
include: safekeeping; verification of ownership and valuation; and cash monitoring. The Depositary’s oversight duties include,
but are not limited to, oversight of share buy backs, dividend payments and adherence to investment limits. The Company’s
Depositary is Augentius Depositary Limited.

The amount by which the market price per share of Closed-end Investment Company is lower or higher than the net asset
value per share. The discount or premium is normally expressed as a percentage of the net asset value per share.

The income from an investment. The Company currently pays dividends to shareholders quarterly.

EPRA Earnings per Share divided by Dividends per share expressed as a ratio.

The annual Dividend expressed as a percentage of the share price.

European Public Real Estate Association. A not-for-profit organisation which aims to foster trust for, and encourage greater
investment in, listed real estate in Europe. (www.epra.com). EPRA also issue best practice recommendations to enhance the
financial reporting of listed property companies.

EPRA Earnings per Share

Recurring earnings from core operational activities. A key measure of a company’s underlying operating results from its
property rental business and an indication of the extent to which current dividend payments are supported by earnings.

EPRA NAV

Net Asset Value adjusted to include properties and other investment interests at fair value and to exclude certain items not
expected to crystallise in a long-term investment property business model. Makes adjustments to the IFRS NAV to provide
stakeholders with the most relevant information on the fair value of the assets and liabilities within a true real estate investment
company with a long-term investment strategy.

EPRA Net Initial Yield

Annualised rental income based on the cash rents passing at the balance sheet date, less non-recoverable property operating
expenses, divided by the market value of the property, increased with (estimated) purchasers’ costs. EPRA’s purpose is to
provide a comparable measure around Europe for portfolio valuations.

GAAP

Gearing

Generally Accepted Accounting Practice. This includes UK GAAP and International GAAP (IFRS or International Financial Reporting
Standards applicable in the European Union). The Company’s financial statements are prepared in accordance with IFRS.

Unlike open-ended investment companies, Closed-end Investment Companies have the ability to borrow to invest. This term
is used to describe the level of borrowings that an Investment Company has undertaken. The higher the level of borrowings,
the higher the gearing ratio. The gearing figure is calculated as debt divided by the market value of the properties held.

Investment Manager

The Company’s Investment Manager is Target Advisers LLP. Further details are set out on page 38 and in note 2 to the accounts.

Leverage

As defined under AIFMD rules, leverage is any method by which the exposure of an AIF is increased through borrowing of
cash or securities or leverage embedded in derivative positions. Leverage is broadly equivalent to Gearing, but is expressed
as a ratio between the assets (excluding borrowings) and the net assets (after taking account of borrowing). Under the gross
method, exposure represents the sum of the Company’s positions after deduction of cash balances, without taking account
of any hedging or netting arrangements. Under the commitment method, exposure is calculated without the deduction of
cash balances and after certain hedging and netting positions are offset against each other.

Loan-to-Value (‘LTV’)

A measure of the Group’s Gearing level. This is calculated as total gross debt as a proportion of gross property value. As the
Group expects to invest the majority of its current cash balance in new care homes, cash is excluded from the calculation.

MSCI

Produces indexes for both privately-held real estate portfolios, as well as publicly-listed organisations which provides a long
performance history and which are mostly appraised quarterly. MSCI produces the index which is used to calculate any
performance fee payable by the Company to the Investment Manager.

Net Asset Value or NAV

The value of total assets less liabilities. Liabilities for this purpose included current and long-term liabilities.

Net Asset Value (‘NAV’)
per Ordinary Share

On-going Charges Ratio

This is calculated as the NAV divided by the number of shares in issue, excluding those shares held in treasury.

A measure of all operating costs incurred in the reporting period, calculated as a percentage of average net assets in that
year. Operating costs exclude costs of buying and selling investments, interest costs, taxation and the costs of buying back
or issuing ordinary shares.

Ordinary Shares

The main type of equity capital issued by conventional Investment Companies. Shareholders are entitled to their share of both
income, in the form of dividends paid by the Investment Company, and any capital growth. As at 30 June 2016 the Company
had only Ordinary Shares in issue.

Share Price

SORP

Total Return

The value of a share at a point in time as quoted on a stock exchange. The Company’s Ordinary Shares are traded on the
Main Market of the London Stock Exchange.

Statement of Recommended Practice ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’
issued by the AIC.

The return to shareholders calculated on a per share basis by adding dividends paid in the period to the increase or decrease
in the Share Price or NAV. The dividends are assumed to have been reinvested in the form of Ordinary Shares or Net Assets.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceProperty Terms

Break Option

Covenant Strength

EBITDA lease

Estimated Rental Value
(‘ERV’)

Fixed and Minimum
Uplift Rents

A clause in a lease which provides the landlord or tenant with an ability to terminate the lease before its contractual expiry date.

This refers to the quality of a tenant’s financial status and its ability to perform the covenants in the lease.

Lease arrangement which constitutes a fixed base rental amount plus variable top up rental payments based on the trading
performance of the underlying properly.

The estimated annual market rental value of a property as determined by the Company’s External Valuer. This will normally be
different from the actual rent being paid.

Rents subject to fixed uplifts at an agreed level on agreed dates stipulated within the lease, or rents subject to contracted
minimum uplifts at specified review dates.

Forward Commitment

A contract pertaining to the future purchase of a property.

Lease

Lease Incentive

Lease Renewal

Net Initial Yield

Occupancy Rate

Rent Review

Reversion

Valuer

A legally binding contract between a landlord and a tenant which sets out the basis on which the tenant is permitted to occupy
a property, including the lease length.

A payment used to encourage a tenant to take on a new lease, for example by a landlord paying a tenant a sum of money
to contribute to the cost of a tenant’s fit-out of a property or by allowing a rent free period.

The renegotiation of a lease with the existing tenant at its contractual expiry.

The initial net income from a property at the date of purchase, expressed as a percentage of the gross purchase price including
the costs of purchase.

The occupancy rate calculates the number of occupied rooms as a percentage of the overall capacity of the care home.
This is an important measure in determining the quality of the property held, the strength of the tenant and the sustainability
of the rental income received.

A periodic review of rent during the term of a lease, as provided for within a lease agreement.

Increase in rent estimated by the Company’s Valuer, where the passing rent is below the ERV. The increases to rent arise
on rent reviews and lettings.

An independent external valuer of a property. The Company’s Valuer is Colliers International Property Consultants Limited
and detailed information regarding the valuation of the Company’s properties is included in note 9 to the accounts.

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic ReportNotice of Annual General Meeting

NOTICE IS HEREBY GIVEN that the fourth Annual General Meeting (‘AGM’) of Target Healthcare REIT Limited (the ‘Company’) will be held on
Thursday 10 November 2016 at 4pm at the offices of Dickson Minto W.S., Broadgate Tower, 20 Primrose Street, London EC2A 2EW for the
following purposes:

Ordinary business
To consider and if thought fit to pass the following resolutions as ordinary resolutions:

1. To receive and adopt the Directors’ report and financial statements of the Company for the year ended 30 June 2016, together with the

auditor’s report thereon.

2. To approve the Directors’ Remuneration Report.
3. To re-elect, a Director retiring by rotation, Professor J Andrews as a Director.
4. To re-elect, a Director retiring by rotation, Mr G Coull as a Director.
5. To re-elect, a Director retiring by rotation, Mr T Hutchison III as a Director.
6. To re-elect, a Director retiring by rotation, Mrs H Jones as a Director.
7. To re-elect, a Director retiring by rotation, Mr M Naish as a Director.
8. That Ernst & Young LLP, be re-appointed as Auditor and that the Directors be authorised to determine their remuneration.

To consider and, if thought fit, to pass resolutions 9 and 10 as special resolutions:

9. That, in addition to any existing power and authority granted to the Directors, the Directors be and are hereby generally empowered to allot
Ordinary Shares of no par value (the ‘Ordinary Shares’) carrying the rights, privileges and subject to the restrictions attached to the Ordinary
Shares or to grant rights to subscribe for, or to convert securities into Ordinary Shares (‘equity Securities’) for cash, including by way of a sale of
Ordinary Shares held by the Company as treasury shares, as if any pre-emption rights in relation to the issue of shares as set out in Article 10(B)
of the articles of association of the Company (the ‘Articles’) and the listing rules made by the Financial Conduct Authority under Part VI of the
Financial Services and Markets Act 2000 (as amended) (the ‘Listing Rules’) did not apply to any such allotment of or grant of rights to subscribe
for or to convert into equity securities, provided that this power:
(a) expires at the conclusion of the next Annual General Meeting of the Company after the passing of this resolution or on the expiry of 15
months from the passing of this resolution, whichever is the earlier, save that the Company may, before such expiry, make an offer or
agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities
in pursuance of any such offer or agreement as if the power conferred hereby had not expired; and

(b) shall be limited to the allotment of equity securities up to 25,218,085 ordinary shares of no par value representing approximately 10 per

cent of the issued share capital of the Company, as at 28 September 2016.

10. That the Company be authorised in accordance with the Companies (Jersey) Law 1991 (as amended) (the ‘Law’), to make market purchases

pursuant to Article 57 of the Law of its own ordinary shares (‘Shares’) (either for retention as treasury shares in accordance with Article 58A (1) (b)
of the Companies (Jersey) Law, 1991 (as amended) (the ‘Law’) for future resale or transfer, or cancellation), provided that:
(a) the maximum number of Shares hereby authorised to be purchased shall be equal to 14.99 per cent of the Company’s issued share capital

on the date on which this resolution is passed;

(b) the minimum price (excluding expenses) which may be paid for each ordinary share is 1 pence;
(c) the maximum price (excluding expenses) which may be paid for each ordinary share shall not be more than the higher of:

(i) 5 per cent above the average closing price on the London Stock Exchange of an ordinary share over the five business days immediately

preceding the date of purchase; and

(ii) the higher of the last Independent trade and the highest current independent bid on the London Stock Exchange;

(d) unless previously varied, revoked or renewed by the Company in a general meeting, the authority hereby conferred shall expire at the

conclusion of the Company’s Annual General Meeting to be held in respect of the year ended 30 June 2017, save that the Company may,
prior to such expiry, enter into a contract to purchase ordinary shares under such authority which will or might be completed or executed
wholly or partly after the expiration of such authority and may make a purchase of ordinary shares pursuant to any such contract; and

(e) the Directors of the Company provide a statement of solvency in accordance with Articles 55 and 57 of the Law.

By order of the Board

R&H Fund Services (Jersey) Limited
Company Secretary
28 September 2016

Registered Office
Ordnance House
31 Pier Road
St. Helier
Jersey JE4 8PW

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceNotes:
1. As a member you are entitled to appoint a proxy or proxies to exercise all or any of your rights to attend, speak and vote at the general

meeting. A proxy need not be a member of the Company but must attend the general meeting to represent you. You may appoint more than
one proxy provided each proxy is appointed to exercise rights attached to different shares. You can only appoint a proxy using the procedure
set out in these notes and the notes to the proxy form. You may not use any electronic address provided either in this notice or any related
documents (including the circular and proxy form) to communicate with the Company for any purpose other than those expressly stated.
2. To be valid any proxy form or other instrument appointing a proxy, together with any power of attorney or other authority under which it is signed
or a certified copy thereof, must be received by post or (during normal business hours only) by hand at Computershare Investor Services (Jersey)
Limited, Queensway House, Hilgrove Street, St. Helier, Jersey JE1 1ES no later than 48 hours (excluding non-working days) before the time of the
meeting or any adjourned meeting.

3. The return of a completed proxy form or other instrument of proxy will not prevent you attending the general meeting and voting in person

if you wish.

4. The Company specifies that only those shareholders registered in the register of members of the Company at 4pm on 8 November 2016
(or, if the meeting is adjourned, 48 hours (excluding non-working days) before the time fixed for the adjourned meeting) shall be entitled
to attend or vote at the meeting in respect of the number of Ordinary Shares registered in their name at that time. In each case, changes
to entries on the register of members of the Company after that time shall be disregarded in determining the rights of any person to attend
or vote at the meeting.

5. As at 28 September 2016 (being the last business day prior to the publication of this notice) the Company’s issued share capital consisted
of 252,180,851 ordinary shares, carrying one vote each. Therefore, the total voting rights in the Company as at 28 September 2016 were
252,180,851 votes.

6. Any person holding 3 per cent or more of the total voting rights of the Company who appoints a person other than the chairman of the meeting

as his proxy will need to ensure that both he and his proxy complies with their respective disclosure obligations under the UK Disclosure
Guidelines and Transparency Rules.

7. Electronic receipt of proxies

To appoint one or more proxies or give an instruction to a proxy (whether previously appointed or otherwise) via the CREST system, CREST
messages must be received by the Company’s agent (ID number 3RA50) no later than the deadline specified in note 2. For this purpose,
the time of receipt will be taken to be the time (as determined by the timestamp generated by the CREST system) from which the issuer’s
agent is able to retrieve the message. The Company may treat as invalid a proxy appointment sent by CREST in the circumstances set
out in Regulation 35(5)(a) of the Uncertified Securities Regulations 2001. Instructions on how to vote through CREST can be found on the
website www.euroclear.com

8. The authority sought by Resolution 9 will only be used to issue shares at a price that represents a premium to the last published net asset

value per share and only when the Directors believe that it would be in the best interests of the Company to do so.
9. Information regarding the general meeting is available from the Company’s webpage at www.targethealthcarereit.co.uk

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceFinancial StatementsStrategic Report
Notes

Target Healthcare REIT Limited Annual Report and Financial Statements 2016

Corporate GovernanceCorporate Information

Target Healthcare REIT Limited (‘the Company’) is a
Jersey registered closed-ended property investment
company which was launched in March 2013.

Directors
Mr Malcolm Naish (Chairman)
Professor June Andrews OBE
Mr Gordon Coull*
Mr Thomas Hutchison III**
Mrs Hilary Jones
Mr Graeme Ross

Registered Office
Ordnance House
31 Pier Road
St. Helier
Jersey JE4 8PW

Investment Manager
Target Advisers LLP
Laurel House
Laurelhill Business Park
Laurelhill
Stirling FK7 9JQ

Company Secretary
R&H Fund Services (Jersey) Limited
Ordnance House
31 Pier Road
St. Helier
Jersey JE4 8PW

Administrator
R&H Fund Services Limited
20 Forth Street
Edinburgh EH1 3LH

UK Legal Adviser
Dickson Minto W.S.
Broadgate Tower
20 Primrose Street
London EC2A 2EW

Broker
Stifel Nicolaus Europe Limited
150 Cheapside
London EC2V 6ET

Jersey Legal Adviser
Ogier
44 Esplanade
St. Helier
Jersey JE4 9WG

Valuers
Colliers International Property
Consultants Limited
50 George Street
London W1U 7GA

Auditors
Ernst & Young LLP
Ten George Street
Edinburgh EH2 2DZ

Tax Adviser
Deloitte LLP
Athene Place
66 Shoe Lane
London
EC4A 3BQ

Depositary
Augentius Depositary Limited
Two London Bridge
London SE1 9RA

Registrars
Computershare Investor
Services (Jersey) Limited
Queensway House
Hilgrove Street
St. Helier
Jersey JE1 1ES

Website
www.targethealthcarereit.co.uk

* Chairman of Audit Committee

** Senior Independent Director

Target Healthcare REIT
Ordnance House
31 Pier Road
St. Helier
Jersey JE4 8PW