Investing in care.
Delivering returns.
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Target Healthcare REIT plc
Annual Report and Financial Statements 2021
About us
Responsible investment
with a clear purpose –
improving the UK’s care
home real estate
– UK’s first social impact investment trust1 – our portfolio delivers for residents,
their carers & local communities
– Conscientious & committed partner to our tenants as an engaged landlord
and a strong advocate of the sector
Our responsible investment in care delivers long-term, sustainable returns.
1 Source: The Association of Investment Companies/Jura Capital.
Financial highlights
EPRA NTA per share (pence)
110.4 +2.1%
Accounting total return (per cent) 1
8.8
Dividend per share (pence)
6.72 +0.6%
2021
2020
2019
110.4
2021
108.1
2020
107.5
2019
8.8
2021
7.0
8.1
2020
2019
6.72
6.68
6.58
IFRS profit (£ million)
43.9 +39%
Dividend cover (per cent) 2
80
Portfolio value (£ million)
684.8 +11%
2021
2020
2019
43.9
2021
2020
2019
31.6
29.9
80
2021
76
2020
684.8
617.6
82
2019
500.9
1 Based on EPRA NTA movement and dividends paid, see alternative performance measures on page 93.
2 Based on adjusted EPRA earnings, see note 8 to the consolidated financial statements and the alternative performance measures on page 93.
Strategic Report
IFC-25
About Us & Financial Highlights
IFC
At a Glance
Chairman’s Statement
COVID-19 Response
Environmental, Social and Governance
Business Model
Investment Manager’s Report
Our Strategy
Principal and Emerging Risks
Section 172 Statement
Corporate Governance
26-55
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
2
4
6
8
10
12
14
22
24
26
28
30
37
38
42
47
50
Financial Statements
56-86
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
Company Statement of Financial Position
56
57
58
59
60
77
Company Statement of Changes in Equity 78
Notes to the Company
Financial Statements
Additional Information
87-IBC
Notice of Annual General Meeting
Shareholder Information
Alternative Performance Measures
EPRA Performance Measures
Data Centre
Glossary of Terms and Definitions
Corporate Information
79
87
90
93
94
96
97
IBC
This document is important and
requires your immediate attention.
If you are in any doubt about the action you
should take, you are recommended to seek
your own independent financial advice from
your stockbroker, bank manager, solicitor,
accountant or other independent financial
adviser authorised under the Financial
Services and Markets Act 2000 if you are in
the United Kingdom or, if not, from another
appropriately authorised financial adviser. If
you have sold or otherwise transferred all
your ordinary shares in Target Healthcare
REIT plc, please forward this document,
together with the accompanying documents
immediately to the purchaser or transferee,
or to the stockbroker bank or agent through
whom the sale or transfer was effected for
transmission to the purchaser or transferee.
Annual Report and Financial Statements 2021
1
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information At a glance
Principled investment
exclusively in well-
designed, purpose-built
care homes
We believe privacy and dignity to be fundamental objectives of care provision. That is why
our homes provide en suite wet-rooms for all residents1, alongside social & outdoor spaces
and a range of intelligently designed modern amenities.
Our portfolio is designed to provide stable income returns from a diversified group of tenants
and rental levels which are sustainable over the long term.
High quality real estate
Diversified
Long-term focus
Scale
5,351 beds
Annualised accounting return
WAULT
7.8% since launch
28.8 years
Wet-rooms1
96%
Tenants
28
Net loan-to-value
15.9%
EPC ratings
92% A-B ratings2
100% A-C ratings2
Fee sources
62% private
38% public
Upwards only rent reviews3
96% inflation-linked leases
4% fixed/other leases
1 Rooms may be acquired without wet-rooms if upgrading is possible.
2 Non-English homes converted to English equivalent ratings.
3 93% of assets in the portfolio are subject to annual uplifts linked to inflation. The remaining homes have either fixed or five-yearly uplifts.
2
Target Healthcare REIT plc
Number of our homes/sites
77
Total valuation
£684.8m
Contractual rent roll
£41.2m
Our portfolio
We have clear criteria
for home design, quality
and facilities to provide great
environments for residents and
care providers. We invest in
homes the length and breadth
of the UK, with portfolio
diversification being key.
Location
Scotland
North East
Northern Ireland
Yorkshire & The Humber
North West
East Midlands
West Midlands
Wales
East of England
South East
South West
Total
Number of
properties
Rent roll
(£m)
3.3
1.0
1.7
8.8
5.7
4.6
2.3
0.5
2.0
7.7
3.6
6
2
4
19
13
10
5
1
3
10
4
77
4
Value
(£m)
54.5
16.0
25.5
136.6
99.9
73.5
46.3
7.0
33.9
130.4
61.2
41.2
684.8
6
2
13
19
1
5
4
3
10
10
1
= Number of properties in region
Annual Report and Financial Statements 2021
3
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Chairman’s Statement
Investing in care,
delivering returns
Dear Shareholder,
We are once again pleased to have achieved our key
objectives: stable investment returns provided to
shareholders and excellent care home real estate to our
tenants and their residents. It is crucial to us that our
longstanding approach is “doing the right thing” through
the provision of fit-for-purpose care facilities which are
also comfortable living, visiting & social spaces.
1. Performance
Our financial performance during the year has
been robust, with EPRA NTA* growth of 2.1%
(110.4 pence from 108.1 pence) underpinned
by a portfolio which has performed resiliently
– 95% of rents have been collected, with rent
cover at our mature homes, a key underlying
profitability metric, at 1.5 times which
compares well to the 1.6 times we would
expect in normal trading conditions. Our
tenants have been reporting steady increases
in occupancy since the sector’s low point
earlier this year as the COVID-19 pandemic
eases somewhat.
Growth in the portfolio’s valuation has
exceeded that which is driven by rental uplifts,
with an overall like-for-like increase of 3.8% as
market pricing reacts to the portfolio’s stable
returns relative to other commercial property
classes and demand from a number of buyers
in the market. Contracted rent has increased
by 5.6% to £41.2 million and adjusted EPRA
earnings have increased by 11.8% to £26.0
million. This translates to dividend cover of
80% and an adjusted EPRA EPS of 5.46 pence.
Under the more widely-used EPRA earnings
metric the dividend was 105% covered.
The COVID-19 pandemic has had an impact
on our business, however rental concessions
have only been requested by a limited
number of our tenants. Physical restrictions
have translated to some delays in portfolio
initiatives, though we are pleased with
progress made more recently with
acquisition and re-tenanting transactions
as we build and shape a robust portfolio
as a basis for long-term stable returns.
We look forward to growing earnings and
dividend cover following our recent equity
raise and significant pipeline of imminent
acquisitions, and take pride in having
delivered a NAV total return of 8.8% for
the year.
4
Target Healthcare REIT plc
* Further details on the EPRA and alternative
performance measures quoted in this report are
included in both the glossary and on pages 93 to 95.
EPRA NTA per share growth
2.1%
Dividend cover
80%
+4ppts
2. Business model and investment
case
Whilst financial performance and tenant
feedback on our real estate have been
satisfying, following the impact of the
COVID-19 pandemic it would be inappropriate
not to have reflected fully on our strategy
and objectives – it is important to us that we
can be a supportive partner to the social care
sector now and for many years to come.
Our business model is on pages 10-11 and,
whilst we have not amended it significantly
in response to COVID-19, our reflections
provided three findings of note:
1. We unapologetically use en suite
wet-room provision as a proxy for real
estate quality. By this, we mean fully
private and functional spaces for each
resident’s personal hygiene requirements,
often with assistance. Eleven years into
my involvement in the sector I still find it
astonishing that 72% of care home places
in the UK fail to provide this. This will
continue to be a strict requirement of
our responsible investment approach.
2. Sustainable rents are crucial. The social
care sector needs long-term, patient
capital partners who understand and
support the investment and commitments
made by care providers. Setting rents at
appropriate levels to weather variable
trading performance, whether that be
local/seasonal or pandemic-type events,
helps drive good behaviours and long-term
thinking at care providers, and investment
returns for us. We will continue to act with
discipline when assessing what rent a
home will support over the long-term.
3. ESG and our responsibilities to society.
We take pride in having delivered a positive
social impact from day one, both directly
via our investment approach and via our
wider advocacy of responsible investment
in the sector. We will enhance our
environmental sustainability efforts, firstly
by more explicit incorporation into our
acquisition, development and portfolio
management activities, and secondly by
moving towards comprehensive collection,
analysis and reporting of data from our
tenants on energy usage at our homes.
See pages 10-11 for our business model
and strategy on pages 14-21 for investment
case support.
Further details on ESG principles are on
pages 8-9.
3. COVID-19 – outlook
We talk more about the impact and our
response on page 6. The most significant
impact has been on our tenants in their
caring for residents and their staff, and their
experience of challenging trading conditions
for a prolonged period as resident occupancy
levels dropped and remained depressed. Our
tenants have responded well, with resident
care as a priority, but also commercially and
operationally to protect their businesses and
meet their obligations to us as long-term
capital providers. We are pleased to see
underlying resident occupancy levels now
recovering and increased optimism from
our tenants.
General staff availability, the effect of
mandatory vaccinations, and local authority
funding constraints will continue to challenge
our tenants in the coming weeks and months,
though we believe our portfolio is well-placed
to manage these and it is comforting to report
that COVID-19 cases across the portfolio
now are very low. Vigilance will be required
in respect of emerging variants, though the
booster vaccination programme will benefit
residents ahead of the general population.
The focus in care homes is on managing the
return to normalised occupancy levels safely.
As restrictions ease, homes should once
again experience the full vibrancy which
increased socialising, activities and
community interaction bring.
See page 6 for more in-depth analysis.
4. Governance
Board Succession
With the majority of the current Directors
having been appointed at the Company’s
launch in 2013, we continue the process
of refreshment started in the prior year.
Subsequent to the year end, I am pleased
to welcome Mr Vince Niblett to the Board.
Mr Niblett has many years of financial and
commercial experience and is expected to
be appointed as Chair of the Audit Committee
shortly, with Mr Coull assuming the role of
Senior Independent Director. I would also like
to take the opportunity to express the Board’s
gratitude for the service and expertise
provided by Mr Hutchison and Professor
Andrews, both of whom will retire following
the conclusion of the forthcoming AGM.
Annual General Meeting (‘AGM’)
The AGM will be held on 14 December 2021.
Shareholders are encouraged to make use
of the proxy form provided in order to lodge
their votes and to raise any questions or
comments they may have in advance of
the AGM through the Company Secretary.
5. Outlook and dividend
I stated last year that our business model,
which prioritises stability of returns, and
our portfolio resiliency were fundamentals
which stood out strongly during a period of
uncertainty. We own real estate of the highest
standards and build relationships with tenants
who have proven to be capable of caring for
residents and operating commercially well
through the most challenging of conditions.
Allied with the non-cyclical, needs-based
demand for places in care homes such as
ours we are confident in being well-placed
to continue to deliver on our objectives.
We once again are grateful for shareholder
support by way of our recent £125 million
equity issuance, which follows our £60 million
issuance during the year. This capital,
alongside additional debt capacity, allows us
to add further assets to the portfolio, including
our first significant portfolio of 18 assets
which will deliver £9.1 million of annual rent
immediately following completion of the
acquisition, expected imminently.
We have carefully considered portfolio
performance and trading conditions as we
emerge from pandemic conditions in setting
our target dividend level for the year to June
2022, and remain committed to providing
a progressive dividend. As previously
announced, in the absence of unforeseen
circumstances, the Board intends to increase
quarterly dividend levels by 0.6% to 1.69
pence per share, providing an annual
dividend of 6.76 pence per share.
The Board remains confident in the Group’s
prospects, whilst remaining cautious and
patient with respect to the portfolio returning
to normalised trading levels. Our strategy
and decisions will reflect our commitment
to being a long-term backer of our tenants
and the social care sector, doing so in a
responsible and supportive manner.
Malcolm Naish
Chairman
19 October 2021
Annual Report and Financial Statements 2021
5
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information COVID-19
Responsible and
engaged response
Our robust balance sheet and approach as a knowledgeable and engaged landlord
allowed us to focus on supporting our tenants to care for their residents.
Impact summary
– Difficult trading conditions for our tenants
with depressed occupancy levels within
their homes
– 95% rental collection achieved
– Reported COVID-19 cases in portfolio
peaked at 3.2% of beds in Spring 2020,
currently very low at five known cases
across three homes
– Occupancy levels and home trading
recovering across the portfolio as tenants
and families become more relaxed
towards new admissions
The nature of the COVID-19 pandemic
changed over the year: from the temporary
relaxation of summer 2020; the Christmas
lockdown of that year; the vaccination rollout
in late 2020/early 2021; and onto this
summer’s easing of restrictions. These peaks
and troughs were not repeated within care
homes, which experienced a more consistent
level of “lockdown” throughout.
Actions and priorities
Our priority areas in response to COVID-19
have been:
1
Helping our tenants navigate
the pandemic landscape
From the early chaos through to the calmer conditions
of today we have put our tenants first.
As well as our own thoughtful consideration, we asked our tenants what we could
do to help, which involved:
– Sharing our understanding of key guidance changes to help tenants digest
and respond quickly (e.g. government PPE guidance changed 20 times over
the course of 28 days)
– Using our network to:
i. Make backup source of PPE supplies available to our tenants at times of
peak scarcity
ii. Source rapid COVID-19 test kits in Autumn 2020 which were available to homes
to facilitate visitors for residents
– Shared learning on hot topics (e.g. vaccination rollout) via webinar hosting to assist
with practicalities and legal considerations
– Offering flexibility on rental payments, where supportable, to allow care for
residents to be the tenants’ priority.
6
Target Healthcare REIT plc
Total return
8.8%
Rent collection
95%
Low COVID-19
prevalence
2
3
Willingness to adapt
our real estate to help
Safeguarding/duty
to socially distance
We adopted a collaborative
approach with our tenants
to consider changes which
delivered real benefits to
carers and residents.
The most common improvement
was not new equipment, but rather
intelligent use of accessible indoor
and outdoor space and entrance/exit
reconfiguration to facilitate visiting
and maintenance of bubbles.
We continued our policy
to not physically visit the
Company’s properties
until post-vaccination
rollout, and now doing
so only when essential
and are closely respecting
each home operator’s
status/attitude.
We have adopted new methods
of engaging with our tenants using
virtual/remote technologies. The team
at the Investment Manager continue
to work from home following
government guidance with enhanced
processes in place in respect of digital
security and data protection.
Impact – financial and portfolio
Our business model is designed to be
resilient, with a strong yet conservative
balance sheet and a quality portfolio
with rental levels set at levels which should
be sustainable beyond short-term shocks
within the longer-term business cycle.
– 95% rents collected for the year
– Balance sheet strengthened with
£60m equity issuance, plus extension
and additions to debt facilities during
the year, and £125 million equity issuance
post-year end
– Ability to support tenants with 34% of
rent roll received monthly in advance
– Accounting total return ahead of
expectations at 8.8% for the year
– No government support/furlough at
the Group or the Investment Manager.
The latter continued to grow its team
to manage the portfolio through the
pandemic and beyond
– Investment programme delayed, with
£70 million of acquisitions during the year.
Capital now fully allocated to pipeline
deals in diligence
Look forward and residual risks:
Across the portfolio COVID-19 case numbers
remain very low amongst residents, with
the vaccination effort providing further
assurance. Our tenants are returning to
normalised trading/operating conditions
and high enquiry levels are converting to
increased resident occupancies.
We will be monitoring:
– A small number of tenants who have
endured 18 months of depressed trading
and where we anticipate financial reserves
to be replenished as occupancy recovers.
– Autumn/winter vaccination “boosters”
– Staffing availability as other sectors
open-up and vaccinations become
mandatory for staff
– Investment market competition given
weight of capital seeking non-cyclical
and stable returns which the portfolio
has continued to evidence
Read more about risks on pages 22 and 23.
Annual Report and Financial Statements 2021
7
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Environmental, Social and Governance
Targeting
Tomorrow
Targeting Tomorrow is our Environmental, Social & Governance
(“ESG”) charter to ensure the social impact objective we launched
with remains embedded for years to come. We take a responsible
approach to every aspect of our business, including environmental
sustainability and governance standards.
Targeting tomorrow gives us the platform to work with
shareholders, tenants and other stakeholders more effectively
than ever to supply care home real estate that tangibly delivers.
Collaborative approach
Our commitment to a responsible approach
means the views of all our stakeholders
matter to us, from the direct relationships we
have with shareholders and tenants, to the
ultimate users of our real estate in residents,
care professionals and local communities.
We asked stakeholders what their
environmental, social and governance
priorities are, and we defined our approach
based on feedback. Key feedback was:
– We are considered to be leaders in
social impact and responsible investment,
however measurement and reporting
thereof is encouraged.
– We should ensure ESG factors are
embedded into our acquisition process
and report on that with quantification
if possible.
– We should continue to be authentic and
transparent in our business relationships.
Care home real estate
that leads the way
The purpose of our business is to improve the
standard of care home real estate, using our
influence as a leading investor in the sector to
encourage improvements in quality. In turn,
our own investment approach will not
compromise quality.
Our approach isn’t changing, we will
continue to focus on “doing the right thing”
led by providing fit-for-purpose real estate for
the long term to care providers who share
our care ethos and can demonstrate
operational capabilities. We support the
United Nation’s sustainable development
goals (“SDGs”) which our strategy is aligned
with. We report in more detail on those SDGs
where we can achieve a tangible impact.
ESG as a concept is evolving, and will
continue to do so. Reliable and comparable
measurement standards remain elusive in
some areas, particularly for social impact
which is our core purpose. Our ESG
framework has been developed as a guide
to help us deliver and articulate our actions
and progress in a fair, balanced and
understandable manner.
The three pillars which govern our approach
are below, with the investment and
partnerships pillars being those which are
most material to our business:
– Responsible investment: As an investor
we understand that our actions have
influence. We use our platform to lead by
example through embedding appropriate
ESG considerations into our decision-
making.
– Responsible partnerships: We engage
with all our stakeholders to drive the
creation of economic, social and
environmental value around our buildings
and in wider society.
– Responsible business: We will treat all
stakeholders with respect and deal fairly
in a manner consistent with how we
would expect to be treated ourselves.
8
Target Healthcare REIT plc
ESG highlights
Commitment
to SDGs
The SDGs which are most relevant to our
business model, and where we believe we
can make a tangible, positive impact, are:
Tenant engagement/
relationships
Comprehensive survey undertaken to ensure our
tenants’ views are considered and our real estate
and approach is delivering for them:
Score
10/10
8/10
10/10
Question
Find working with us to
be a positive experience.
Believe our declared values, ethics
and purpose are clearly evident
in our discussions with them.
Believe we actively listen, take
time to understand their business
and proactively resolve questions
and issues.
Read more about our ESG Engagement on
pages 20 and 21 >>
Environmental –
Real estate
Our portfolio is modern and well-designed, with
environmental credentials ahead of upcoming
legislative requirements.
EPC Rating
% portfolio
A
B
C
D or below
Total
6%
86%
8%
–
100%
Environmental –
relationships
As a real estate owner with a growing number
of properties we are committed to using our
platform to positively influence behaviours of
the users of our buildings. We have commenced
gathering energy consumption/emissions data
from our tenants, which we will analyse alongside
other portfolio information, to allow us to plan
and recommend actions and initiatives aimed
at improving energy consumption/efficiency.
The data collection will also allow us to
transparently report on the impact the usage
of our real estate is having.
We recognise our responsibility as a long-term
real estate investor and resolve to take intelligent
actions balanced with our social impact priority
and value for money for all stakeholders.
Annual Report and Financial Statements 2021
9
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information
Business Model
Making a real difference
to people’s lives
We are driven by our purpose to improve the standard of living for older people in the UK. Target
accelerates the improvement in the physical standards of UK care homes through long-term,
responsible investment in modern real estate which delivers our return objectives to shareholders.
We are advocates of the benefits that intelligently designed, purpose-built care homes can bring
and we want more residents, care professionals and local communities to benefit from their
positive social impact.
Objectives
To grow a robust portfolio
Our focus is on real estate quality and stability for the long-term.
Read more on pages 14 and 15 >>
Sustainable returns from a portfolio management
approach with valued relationships as its core
To manage relationships effectively within a complex sector
as a highly engaged landlord.
Read more on pages 16 and 17 >>
Regular dividends for shareholders
Our focus is on disciplined & conservative financial and risk
management to deliver earnings supporting quarterly dividends.
Read more on pages 18 and 19 >>
To achieve our social purpose via responsible &
sustainable investment
Our focus is on our social impact, allied with a firm commitment
to environmental sustainability and good governance.
Read more on pages 20 and 21 >>
What we do
We attract capital to the sector,
only investing in the highest
quality real estate and ensuring
that we get the right tenants.
We provide each tenant with
the security of a long lease at
a sustainable rent, allowing
them to grow and improve
their business.
Our Investment Manager is
a specialist who understands
the operational challenges our
tenants face on a daily basis
when providing quality care,
and is there to help them
every step of the way.
Responsible investment
underpins our strategy
10
Target Healthcare REIT plc
How we do it
Impact
– A firm investment approach with a compelling
track record on investible care home real estate
– Detailed bottom-up assessment of real estate
and the characteristics of its local market
– Experienced & knowledgeable sector experts
to assess sustainable rent levels
– Diversification of portfolio by tenant,
geography and end-user payment profile
– Collaborative approach to working with
our tenants, from day one
– Specialist sector knowledge and insight,
sharing of best practice
– Regular asset visits and frequent dialogue
with tenants at operational and senior
management levels
– Data-led, comprehensive management information
collected monthly for each asset
– Leverage balance sheet strength, enhanced
returns from gearing levels appropriate for
our long-term commitment to the sector
– Cost control via operational efficiency with
benefits of increasing scale
– Long income visibility with inflation-linked uplifts
– Commit to our approach, and understand our
influence
– Learn, reflect, respond to feedback
– Hold ourselves to the high standards expected
of social care responsibility
£684.8m
portfolio value
28
tenants
100%
portfolio occupancy
10/10
positive tenant experience
Read more on page 9
6.72
pence dividend
8.8%
total return
5.46
pence adjusted
EPRA EPS
1.55%
ongoing charge
96%
wet-rooms
92%
EPC A-B1
100%
EPC A-C1
1 Non-English homes converted to English equivalent ratings.
Annual Report and Financial Statements 2021
11
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Investment Manager’s Report
We believe in taking
a long-term view
The portfolio has outperformed the MSCI UK Annual Healthcare Property Index
once again, in respect of the calendar year to 31 December 2020, with a portfolio
total return of 8.2% relative to the Index’s 6.8%.
Target vs. Composite: +1.21%
Composite vs. Gilts: +3.66%
Yield progression chart
8%
7%
6%
5%
4%
3%
2%
1%
0%
Jun 10
Jun 11
Jun 12
Jun 13
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18
Jun 19
Jun 20
Jun 21
Target Healthcare REIT
Listed Primary Healthcare Composite
UK 15 Gilts
Investment yields continue their modest and consistent tightening
(i.e. asset valuations increase and/or the perceived risk level decreases)
Portfolio review
The portfolio has outperformed the MSCI
UK Annual Healthcare Property Index once
again, in respect of the calendar year to
31 December 2020, with a portfolio total
return of 8.2% relative to the Index’s 6.8%.
The portfolio’s annualised total return
since launch now stands at 11.2% while
the portfolio’s last five-year period has an
annualised total return of 10.5% relative
to 8.6% for the Index.
The investment progression chart (shown
opposite) and the risk/return chart based on
data from MSCI (in data centre on page 96)
both demonstrate stable returns and
movements consistent with other stable
and “lower risk” asset classes in UK gilts
Health & social care
We write at a time when our tenants report a positive outlook and underlying occupancies within the homes they run are increasing
towards normalised levels as we emerge from the pandemic. We believe the combination of quality real estate, talented operators,
and the demographic tailwinds supporting demand for needs-based care will translate to improved trading with time. In the meantime,
we note below a number of areas which are prominent in our minds and those of our tenants:
Path to occupancy
recovery
Sector
reputation
Staffing
pressures
Occupancy has been depressed from
normal levels in the past 18 months,
not necessarily through unusually high
deaths, but through lack of admissions
as families sought to keep their loved
ones at home. Many families found
more time to care due to furlough and
working from home. As lockdowns
dissipate and furloughs come to an
end, occupancy is on the rise again,
for what is a “needs-based” service. We
anticipate steady increases as homes
cautiously admit new residents in small
numbers, ensuring people settle into
their new homes with adequate staffing
and care plans effected.
Early on in the pandemic, care home
sector reputations appeared to suffer
from the perception operators were
unable to adequately protect those
in their care, despite the strength of
pre-existing infection control protocols
which we are now all familiar with
applying. More recently that perception
has shifted somewhat, as evidence
emerged of unreasonable pressure put
on operators by the volume of hospital
discharge patients into homes with
undue haste and lack of robust testing
protocols. We pause at this point to
pay tribute to those staff who worked
through these outbreaks, and the care
they provided, and would endorse a
positive view of the people in the sector.
We see evidence of staffing shortages
affecting our sector similar to leisure,
hospitality and some logistics businesses.
The majority of our tenants feel this will
be manageable and are enhancing their
recruitment and HR functions in
response, as well as taking advantage
of some flexibility in immigration
allowances to find suitably skilled
individuals. Good staffing management
is crucial to good care provision, and
as the largest single item on a care
provider’s expense line, is directly core
to profitability. Regardless of our tenants’
ability to manage this well, we do foresee
wage cost inflation in response to these
supply-side challenges. We anticipate
our tenants will effectively manage
these through fee increases, principally
through privately-funded residents.
12
Target Healthcare REIT plc
investors whose home markets are saturated
and lower-yielding. Their initial forays were
into poorer quality real estate, by way of
portfolio acquisitions in recent years, though
they are currently more active in their pursuit
of the real estate we have been advocating
for as fit-for-purpose.
None of this is a surprise in a market where
only 28% of beds meet our quality standards,
and which needs substantial modernisation
overall. The non-cyclical nature of returns,
which are still relatively high-yielding, make
the investment desirable for the income
investor. Whilst we welcome new capital
to support development of real estate and
operator growth, we would argue that
specialist knowledge and a committed
long-term holder would be characteristics
of the suitable investor.
Summary
At the height of the pandemic, there
were calls to review the use of care
homes as a future resource for our
ageing elders. We in the social care
sector and wider healthcare
environment know that to be naive;
care homes will always be required
as part of the mix of resources in this
rapidly ageing society, but quality of
facility must improve, and we are
pleased to be at the forefront of
that provision.
and the listed primary healthcare composite
which consists primarily of GP surgery funds
with almost 100% government-backed
underlying income. The portfolio’s EPRA
topped-up NIY now stands at 5.83%, down
from 6.04% in 2020, which reflects well the
shift in market pricing we have seen. This
valuation level also reflects the portfolio’s
underlying trading performance, robust rent
collection and positive outlook/demand for
our real estate through, and emerging from,
the COVID-19 pandemic.
The portfolio’s low volatility measure, as
shown on the MSCI chart, is a core aspect
of the investment case, which anticipates
stable, non-cyclical returns at a total return
level which could suggest a mis-pricing of
the asset class. Although we acknowledge
this may be partially driven by the relatively
low collateral in our tenants’ balance sheets
(as they tend to be family/owner-managed
regional businesses), we believe our
investment approach, skill in investment
appraisal, and assembly of a diversified
portfolio of scale helps in mitigation.
We report on portfolio management
activities in more detail on pages 14-17.
UK care home investment market
The market experienced a subdued 2020
due to the COVID-19 pandemic, as market
participants focussed on managing their
way through the crisis, protecting residents
and their own personnel. Asset visits for
inspections, home management meetings
and general marketing were logistically
difficult, and not a priority for operators
regardless.
As restrictions eased later in the year we saw
activity pick-up again, with pricing continuing
to respond to significant investment demand
in what is a competitive market for the type
of assets we acquire and hold. We did not
see many acquisition opportunities reflecting
distressed circumstances as the sector
traded robustly, and would expect sales
processes for assets whose trading has been
significantly affected by COVID-19 to delay
until resident occupancy recovers towards
normalised levels.
As well as demand from the typical domestic
investors, the main change we have noted in
the year has been an uptick in activity from
European investors, these are generally larger
and less specialist healthcare real estate
Residual COVID-19
considerations
Government policy
(support and onwards)
Mandatory vaccinations for social care
staff is a point of discussion currently.
Many of our larger tenants are reporting
staff vaccination rates at 95% plus, and
are not unduly concerned, though find
it to be a frustration that other
healthcare sectors’ staff do not have
the same restrictions. We will all be alert
to the possibility of new variants and
waning immunity with time, though this
sector will likely have the advantage of
priority access to booster vaccinations
and any necessary supplemental
vaccination rollouts.
Government minds have once again
been concentrated on social care
reform and a funding solution.
Deadlines for a comprehensive solution
via a detailed White Paper have slipped,
having been replaced with some
interim measures. These measures,
whilst bordering on being a weak
positive for the sector overall in
recognising and delivering some
funding, are statistically insignificant
given (a) the overall size of the funding
need and (b) being unclear on the
efficiency of directing funding to the
care providers.
Government financial support through
the pandemic was, however, well-
targeted and well-received, with
England’s Infection Control Fund
(similar in other UK nations) covering
some of the costs of staff overtime,
additional equipment and supplies,
as well as the management burden
of the testing regime.
Annual Report and Financial Statements 2021
13
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information
Our Strategy
Our purpose to improve the standard of living for older people
in the UK is achieved through our four strategic pillars as detailed
in our business model on pages 10 and 11. You can read more
about these over the next eight pages.
Strategic pillar #1
To grow a robust portfolio
We are creating a portfolio of scale with a clear focus on the quality of real estate and
diversification of income sources to provide a stable long-term platform for returns.
Acquisitions and developments
£70 million of investment, inclusive of costs,
has been committed to five new assets during
the year, growing the portfolio to 77 assets,
inclusive of 73 operational care homes and
four development sites, the latter being
underpinned by fixed-price or capped
development agreements and which are
pre-let on long (30 years plus) FRI leases
to trusted operating partners.
These investment commitments made during
the year along with the acquisition of a further
three assets completed post-period end have
fully committed the capital raised in the
March 2021 equity issuance.
One of the Group’s existing development sites
reached practical completion early in the year
with that brand new care home in Burscough
welcoming residents in July 2020. A further
two development sites have reached practical
completion since the period end, with the
three homes together providing a combined
total of 214 new beds to their local markets,
all benefiting from en suite wet rooms within
modern, fit-for-purpose homes.
Real estate standards: commitment
to responsible investing
We have a clear vision on what makes care
home real estate fit-for-purpose, with the
principal objective that residents can live with
choice, dignity and privacy in a comfortable
and pleasant environment. We also want
intelligent layouts and facilities for our
tenants to efficiently deliver their services.
We require our homes to include generous
bedrooms, spacious communal areas and en
suite wetroom facilities that are vital for both
dignity during care and for infection control
within a home. 96% of the 5,351 beds in the
portfolio are equipped with en suite wet
rooms while 100% have en suites. We are
committed to upgrading the remaining beds
in the portfolio that do not meet this
minimum requirement as identified during
diligence on these acquisitions.
The national comparator on en suite wet
rooms has grown to be 28% currently from
only 17% in 2017, driven both by the provision
of new homes and the exit of many non-
compliant older homes from the market.
Diversification
Diversification continues to be a focus for the
Group in order to manage portfolio risk with
the metrics remaining broadly unchanged
from 2020 other than the positive addition of
two (net) new tenants bringing the total to 28.
The largest tenant is unchanged from 2020
being Ideal Carehomes, accounting for 13.1
per cent of the Group’s contractual rent.
Sources of resident fees, the underlying
income received by our tenants, continue
to originate from both public and private
sources, with a deliberate bias towards the
latter in our portfolio assembly. Census data
collected during the period notes that 44 per
cent of the portfolio’s underlying residents
are funded exclusively from private sources,
18 per cent by a mix of private and public
funding, where “top-up” payments are made
by Local Authorities, and 38 per cent are
funded from public sources.
Geographically, the largest region by asset
value remains Yorkshire & the Humber, with
20 per cent. The Group’s portfolio contains
homes from all regions of the UK and the
Investment Manager continues to explore
opportunities for acquisitions that will further
enhance the existing geographic
diversification.
Valuation Growth analysis (£ millions)
Underlying fee income diversification
700
650
600
550
500
450
400
23.6
684.8
43.6
617.6
30 June 20
Acquisitions,
developments
and disposals
Rent reviews
and valuation
growth
30 June 21
Increase
Total
14
Target Healthcare REIT plc
18%
38%
44%
Purely Private
Purely Public
Mix of Private and Public
The Manor
The Manor is a luxury care home located in
Edinburgh and is well established as one of
the best homes in the region. The impressive
real estate houses 74 large bedrooms with
full provision of en suite wet-room shower
facilities, wide corridors and an intelligently
designed layout. Residents and their visiting
friends and families benefit from substantial
public lounges, a cinema room, hair &
beauty salon, activities room and outdoor
spaces on all floors resulting in one of the
highest space per resident ratios of any
home in the portfolio.
Since opening in April 2018, the home has
developed a strong local reputation and
has filled quickly with occupancy largely
comprised of private fee-paying residents. The
densely populated area surrounding the home
provides a large catchment population with
strong demographic demand characteristics.
Following the exit of the original operator of
The Manor as part of the acquisition, the
home has been leased to Caring Homes
group, a well-respected family-run group
with care homes throughout the UK and an
existing tenant of the Group for some years.
Key portfolio statistics
En suite wet-rooms
96%
Real estate standards
47m2
per resident across portfolio
Average property age
8 years
Annual Report and Financial Statements 2021
15
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Our Strategy continued
Strategic pillar #2
Sustainable returns from a portfolio
management approach with valued
relationships as its core
The Investment Manager has deep experience within the sector and uses that specialism to
engage effectively with our tenants, understanding the complexities inherent in the sector.
Valuation growth on a like-for-like basis was
3.8 per cent and a substantial driver to overall
growth in the portfolio value of 10.9 per cent
during the year. The remainder was driven
by acquisitions and developments at 4.0 per
cent (net of disposals) and 3.1 per cent
respectively. Contractual rent increased
by 5.6 per cent over the period with new
acquisitions, net of disposals, contributing
3.8 per cent, and the completion of
developments contributing 1.8 per cent.
The annual uplifts from rent-reviews in
the year of 1.8% were netted off by rental
reallocations and adjustments made as a
result of asset management initiatives.
Rental collection has continued its robust
performance throughout the pandemic, at
95% for the year. This strong performance
in a challenging context demonstrates the
portfolio’s resiliency with its sustainable rent
levels and diversified tenant base, further
supported by portfolio rent cover of 1.5x.
This metric reflects the underlying profitability
at the homes, over a period substantially
affected by depressed occupancy levels as
a result of COVID-19. Sustainable rent levels;
commercially astute trading by our tenants;
and some government support have each
contributed. The portfolio has retained a
level of rent cover (1.2x) if non-recurring
government contributions are excluded.
Recovery in occupancy levels, as reported
by our tenants as COVID-19 restrictions ease,
provides a platform for the portfolio to return
to normalised trading conditions which
we anticipate will translate to steady growth
to stable rent cover levels at or above 1.6x
in time.
Current COVID-19 prevalence across the
portfolio is very low, however the Investment
Manager continues to collect case numbers
from the Group’s operators and will monitor
this closely.
Engaged
The Investment Manager has continued
to support the Group’s growing base of 28
tenants while the importance of selecting
operators demonstrating high levels of care
ethos and expertise has been reaffirmed
throughout the pandemic. We once again pay
tribute to the carers, staff and management
who have performed admirably throughout
the challenges that the care sector has faced
over the last year. As a highly engaged
landlord, the Group through its Investment
Manager will continue to liaise closely with
its tenants to ensure that the Group’s income
is protected through sustainable rental levels
and that we remain supportive of operators
that seek to raise the overall standard of care.
As part of our ongoing desire to be an
effective and engaged landlord, we invited
our tenants to participate in a survey to
evaluate their satisfaction with our
engagement. The results from this survey
were very encouraging:
– 100% of responders agreed that working
with us is a positive experience and that
we actively listen, taking time to
understand their business, proactively
resolving questions and issues.
– 82% also agreed that we demonstrate
our commitment to investing in homes
that provide the best environments for
residents and their care providers.
We look forward to enhancing this survey
in future years to supplement our ongoing
discussions with our tenants and addressing
any concerns or suggested improvements
forthcoming.
As part of our ongoing data gathering and
support of our tenants during the year we:
– Collected and analysed monthly
management information for each home.
– Visited (either virtually or physically) each
home in the portfolio.
– Had >1,000 calls/interactions with our
operators at all levels of management.
While these calls were often emotional during
lockdown as a number of homes experienced
difficulties through COVID-19 outbreaks, the
dedication and diligence of the care staff
across the portfolio was demonstrated
repeatedly while their appreciation for our
engagement was also noted.
Performance
The Group’s key metrics have performed
positively. The portfolio total return has
again outperformed the MSCI UK Annual
Healthcare Property Index, with a total
return for the calendar year to December
2020 of 8.2 per cent relative to the Index’s
6.8 per cent.
The portfolio has outperformed the Index each
year since launch, as shown in the chart below.
Portfolio total return vs MSCI
Mature homes rent cover
20%
15%
14.5
10.3
10%
7.9
11.7
11.9
10.6
12.7
9.1
9.2
7.4
8.2
6.8
1.65x
1.6x
1.55x
1.5x
1.45x
1.4x
1.35x
5%
0%
2015
2016
2017
2018
2019
2020
1.3x
Dec
17
Jun
18
Dec
18
Jun
19
Dec
19
Jun
20
Dec
20
Jun
21
MSCI UK Annual Healthcare Property Index
Total Return
Target Healthcare REIT Portfolio Total Return
16
Target Healthcare REIT plc
operator providing an immediate valuation
and net income uplift. The re-tenanting of
the second home is expected to complete
imminently with revised rental terms and a
lengthened lease duration.
A further re-tenanting was completed during
the year from a large national operator to a
family-owned operator on a lengthened
lease term with a substantial transfer payment
received from the outgoing tenant which will
fund capital expenditure on the home along
with the rental incentives provided to the
new tenant. The impact on residents and
staff was minimised during this transition.
The Investment Manager’s experience and
sector expertise has been apparent in a
conviction to support the Group’s other
tenant who has been a significant contributor
to rent arrears. That tenant’s two high-end,
immature homes are now trading well, with
strong occupancy levels and growing rent
covers, with full value recovery to investment
case levels anticipated.
The combination of decisive re-tenanting
action when required alongside patience
and support when justified for the right
operators reflect our approach to achieving
shareholder returns in a responsible manner.
Portfolio Management
The Investment Manager has been closely
monitoring a small number of tenants and
completed some initiatives to further
improve rent collection and portfolio
resiliency going forward. A tenant operating
two of the Group’s homes had been a
contributor to rental arrears for some time as
they experienced financial distress and went
through a restructuring of their business.
The Group has resolved its position with this
tenant, reaching an agreement for partial
settlement of outstanding rent and a
consensual re-tenanting of both homes.
The re-tenanting of one of these homes was
completed during the year to a family-owned
KPIs
Portfolio total returns
8.2% vs. 6.8%
ahead of the relevant annual MSCI index
(year to 31 December 2020)
East Midlands Home
The Group owns a modern, purpose-built
home in the East Midlands which it originally
acquired in 2014. The home’s location
provides supportive local supply and
demand characteristics, and ranks well with
regard to the quality of competing homes in
its 10-minute drive time. After operating the
home successfully for a number of years, the
original tenant operator’s relationship with
the Local Authority deteriorated, culminating
in an embargo on publicly funded residents
entering the home. Recognising the potential
for significant impact on residents for the
home, as well as seeking to protect the
long-term future of the home, the
Investment Manager met with both parties
and worked with them to resolve the
situation with minimal impact on residents
by re-affirming its commitment to the home.
The home was re-tenanted to a new
operator in 2018, utilising the Investment
Manager’s relationships within the sector,
with the outgoing operator committing to a
financial contribution to improve the home
and providing a three-year rent guarantee.
This has allowed the incoming operator to
improve trading in a sustainable manner
and provided protection to the Group’s
investment, with the guarantee being called
upon during the current year to recoup rent
arrears from the transition period.
Occupancy in the home has reached 100%
in recent quarters with consistently strong
trading and corresponding rent cover allied
with pleasing operations and care provision.
The Group is pleased that this long-term
approach and committed asset management
activity has resulted in a home that is once
again thriving, to the benefit of the local
community.
Annual Report and Financial Statements 2021
17
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Our Strategy continued
Strategic pillar #3
Regular dividends for shareholders
Total dividends of 6.72 pence per share were declared and paid in respect of the year to 30 June 2021,
an increase of 0.6 per cent on 2020, and reflecting a yield of 5.8 per cent based on the 30 June 2021
closing share price of 115.4 pence.
Earnings & dividend
Adjusted EPRA earnings per share, used by
management as a key metric in assessing
operational performance, increased to 5.46
pence for the year. Dividend cover using the
adjusted earnings measure also increased,
to 80% for the year. Applying the more
widely used comparative of EPRA earnings,
the dividend was fully covered at 105%.
The Group anticipates achieving a covered
dividend when fully invested at an appropriate
gearing level. The significant share issuance
subsequent to year-end is intended to fund a
substantial pipeline of imminent acquisitions,
the majority of which are fully income
generating immediately on completion.
The Group’s current scale, patiently earned
through modest fund raises to date, its track
record as a reliable counterparty and its
flexible debt arrangements, provide the
platform to grow the portfolio and earnings
whilst minimising the cash drag effect of
undeployed capital on dividend cover.
For the year under review, cash drag has
impacted earnings and dividend cover as
acquisitions were slowed due to COVID-19
initially. The oversubscribed equity issuance of
£60 million in March 2021 has been deployed
during the final quarter and subsequent to
the year-end, with earnings now accruing on
this capital. Admin expenses of £11.1 million
(2020: £9.5 million) includes £2.7 million of
provisions for doubtful rental income, also
adversely impacting reported dividend cover.
The Investment Manager has implemented
a number of asset management initiatives
during the year and the Group is confident
of successful solutions being reached on the
other homes contributing to arrears which
have shown much improved performance in
recent months. The quality of the real estate
available and supportive local demographics
for these homes reaffirms the Group’s view
that we expect to see positive developments
in these homes in the coming weeks and
months.
As previously announced, and reflecting a
cautiously optimistic outlook for the portfolio,
in the absence of unforeseen circumstances
the Board intends to increase quarterly
dividend levels by 0.6% to 1.69 pence per
share, providing an annual dividend of 6.76
pence per share.
Total Returns
The Group targets modest capital growth as
well as its income priority, with a belief that
a quality portfolio of modern care home
real estate is likely to be in demand. Despite
the difficult trading conditions across the
portfolio from COVID-19, and depressed
occupancy levels from slower admissions,
the portfolio has continued to perform, with
robust rent collection, and has a positive
outlook. Being one of the first investment
asset classes to fully benefit from the
COVID-19 vaccination programme has
helped stimulate the anticipated return
towards normalised trading.
This robust and sustainable performance,
the completion of some portfolio initiatives,
and the investment demand for the stable,
non-cyclical returns from a diversified
portfolio of quality assets, has seen asset
value appreciation. EPRA NTA has grown 2.1
per cent to 110.4 pence per share from 108.1
pence per share, NAV total return for the year
has been 8.8 per cent, and annualised NAV
total return over the period since the Group’s
launch in March 2013 has been 7.8 per cent.
The portfolio’s EPRA topped-up NIY has
tightened to 5.83 per cent from 6.04 per cent.
Efficient capital structure
In November 2020, the Group entered into
agreements with two of its existing lenders
(RBS and HSBC) in order to extend the terms
and increase its facilities with each. These
revised arrangements increased available
facilities to £220 million from £180 million
while maintaining the weighted average cost
of debt and extending the weighted average
term to maturity. At 30 June 2021, these
metrics were 2.9% (2020: 2.9%) and 4.8 years
respectively (2020: 4.2 years).
The Group was also the first real estate
client of each of these lenders to transition
its facilities to a SONIA interest basis from
LIBOR, with the latter due to be phased-out
by June 2023.
The Group retains flexibility through its
debt-mix with £140 million of the £220
million being fully revolving facilities
and continues to focus on achieving
competitively-priced debt at appropriate
durations.
Subsequent to the year-end the Group has
agreed heads of terms for an additional £100
million of long-term facilities with an existing
lender which are intended to complement
the equity issuance to efficiently fund the
significant pipeline. Diligence procedures
and legal documentation are currently
being completed on this anticipated
facility increase.
EPRA NTA per share (pence)
EPRA NTA per share has increased to 110.4 pence, primarily driven by an increase in property
valuations. See the yield progression chart on page 12 for more context.
120
115
110
105
100
95
90
85
80
5.4
4.2
108.1
(0.5)
(6.6)
(0.2)
–
110.4
30-Jun
20
Acquisition
costs
Property
revaluations
Adjusted
EPRA
earnings
Dividends
paid
Loan
repayment
costs
Equity
issuance
30-Jun
21
Increase
Decrease
Total
18
Target Healthcare REIT plc
Earnings summary
Rental income (excluding guaranteed uplifts)
Admin expenses (including management fee)
Net financing costs
Interest from development funding
Adjusted EPRA earnings
Adjusted EPRA EPS (pence)
EPRA EPS (pence)
Adjusted EPRA cost ratio
EPRA cost ratio
Ongoing charges figure (‘OCF’)
2021
(£m)
41.2
(11.1)
(4.8)
0.6
26.0
5.46
7.16
26.6%
22.3%
1.55%
Movement
+14%
+17%
+12%
-40%
+12%
+3.6%
+3.5%
+90bps
+80bps
+4bps
2020
(£m)
36.0
(9.5)
(4.3)
1.0
23.2
5.27
6.92
25.7%
21.5%
1.51%
Annual Report and Financial Statements 2021
19
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Our Strategy continued
Strategic pillar #4
To achieve our social purpose
Pillar
What this means for Target
SDGs
What we did in 2021
What we’ll do in 2022 and beyond
Responsible
investment
As an investor we understand that
our actions have influence. We use
our platform to lead by example
through embedding appropriate
ESG considerations into our
decision-making.
Leading in social impact for care home real estate
– We understand the importance of maintaining a portfolio that supports the needs of tenants
and residents, which in turn contributes to the long-term sustainability of social care
infrastructure in the UK.
Energy and climate change: Responsible acquisitions & portfolio management
– Energy efficiency is a specific consideration in our investment analysis for acquisitions,
developments and portfolio management decisions.
– In our role as a responsible landlord we are committed to helping our tenants identify
and implement energy reduction and efficiency measures.
Responsible
partnerships
We engage with all our stakeholders
to drive the creation of economic,
social and environmental value
around our buildings and in wider
society.
Tenant selection, engagement & collaboration
– As a responsible, proactive landlord we prioritise good, open relationships with our tenants.
– We make sure that we solicit, assess and respond to feedback on our portfolio and our
behaviours to ensure carers and residents can be respected and cared for with dignity.
– We only select tenants who share our care ethos and can deliver operationally.
Communities and society
– We fully appreciate the vital role that care homes play in every community, and take decisions
in the best interest of maintaining continuity of care for residents.
– Advocate for and support the sector.
Responsible
business
We will treat all stakeholders with
respect and deal fairly in a manner
consistent with how we would
expect to be treated ourselves.
Governance & transparency
– We uphold the highest ethical standards and adhere to best practice in every aspect of
our business.
– Our governance and behaviour treat transparency for all of our stakeholders as core.
People, culture and wellbeing
– We encourage employment practices across our key service providers that reflect our
core values, with a focus on wellbeing, fairness and opportunity for all.
20
Target Healthcare REIT plc
Social
Social
– 5 homes acquired, 344 resident spaces
– Continue to advocate for quality real estate
– Development commitments for 272 new beds
– Monitor new ideas (architecture, dementia-
friendly design, energy)
– Monitor design and innovation response to
– Homes provide space of 47m2 per resident
– All real estate has generous social and
COVID-19
as at year-end
– 96% wet-rooms
outdoor space
Energy
– 100% A-C EPC ratings
Energy
– Balanced assessment of data &
– Introduced energy efficiency consideration
recommendations obtained from
into policies
BREEAM reports
– Instructed BREEAM-in use assessment for a
– Increase proportion of leases with “green”
representative sample of portfolio
– “Green” provision on energy usage reporting
introduced into our standard lease
reporting provisions to gather more data
on energy consumption patterns from our
tenants for use in decision-making
– Target Fund Managers supports the Edinburgh
– Manager to use toolkit and resources to
Science Climate and Sustainability programme
progress its net zero journey
and became a founding pledger of its Mission
Net Zero project in 2021
Tenants
Tenants
– 10/10 “positive experience” satisfaction score
– Focus on supporting our tenants with COVID-19
– Committed engagement with our tenants to
recovery, considering further real estate design
consider and consent to real estate alterations
enhancements in response
in response to COVID-19 challenge
– Invest in fully understanding and responding
to lower-scoring areas from tenant survey
Communities
Communities
– Re-tenanted two homes with new tenants
– Complete re-tenanting initiatives identified
committed to continuing care provision
which will benefit long-term care continuity
– Continue to facilitate tenant interaction and
learning sessions as COVID-19 restrictions ease
Governance & transparency
Governance & transparency
– Undertook director recruitment process
– To prepare and publish enhanced reporting
resulting in Mr Niblett being appointed post
suite, inclusive of:
year end
– GRESB reporting following data collection
– Investment Manager successfully applied to
process
become signatory to the FRC Stewardship Code
– Comprehensive sustainability reporting,
– £3 million taxation directly paid to the UK
inclusive of EPRA measures
government by way of VAT and stamp duty land
taxes. Dividends paid of £32 million are
assessed for tax upon reaching shareholders
Pillar
What this means for Target
SDGs
What we did in 2021
What we’ll do in 2022 and beyond
Responsible
investment
Leading in social impact for care home real estate
– We understand the importance of maintaining a portfolio that supports the needs of tenants
and residents, which in turn contributes to the long-term sustainability of social care
infrastructure in the UK.
As an investor we understand that
our actions have influence. We use
our platform to lead by example
through embedding appropriate
ESG considerations into our
decision-making.
Energy and climate change: Responsible acquisitions & portfolio management
– Energy efficiency is a specific consideration in our investment analysis for acquisitions,
developments and portfolio management decisions.
– In our role as a responsible landlord we are committed to helping our tenants identify
and implement energy reduction and efficiency measures.
Responsible
partnerships
We engage with all our stakeholders
to drive the creation of economic,
social and environmental value
around our buildings and in wider
society.
Tenant selection, engagement & collaboration
– As a responsible, proactive landlord we prioritise good, open relationships with our tenants.
– We make sure that we solicit, assess and respond to feedback on our portfolio and our
behaviours to ensure carers and residents can be respected and cared for with dignity.
– We only select tenants who share our care ethos and can deliver operationally.
Communities and society
– We fully appreciate the vital role that care homes play in every community, and take decisions
in the best interest of maintaining continuity of care for residents.
– Advocate for and support the sector.
Responsible
business
Governance & transparency
our business.
– We uphold the highest ethical standards and adhere to best practice in every aspect of
We will treat all stakeholders with
respect and deal fairly in a manner
consistent with how we would
expect to be treated ourselves.
– Our governance and behaviour treat transparency for all of our stakeholders as core.
People, culture and wellbeing
– We encourage employment practices across our key service providers that reflect our
core values, with a focus on wellbeing, fairness and opportunity for all.
Social
– 5 homes acquired, 344 resident spaces
– Development commitments for 272 new beds
Social
– Continue to advocate for quality real estate
– Monitor new ideas (architecture, dementia-
as at year-end
– 96% wet-rooms
– Homes provide space of 47m2 per resident
– All real estate has generous social and
outdoor space
Energy
– 100% A-C EPC ratings
– Introduced energy efficiency consideration
into policies
– Instructed BREEAM-in use assessment for a
representative sample of portfolio
– “Green” provision on energy usage reporting
introduced into our standard lease
– Target Fund Managers supports the Edinburgh
Science Climate and Sustainability programme
and became a founding pledger of its Mission
Net Zero project in 2021
Tenants
– 10/10 “positive experience” satisfaction score
– Committed engagement with our tenants to
consider and consent to real estate alterations
in response to COVID-19 challenge
Communities
– Re-tenanted two homes with new tenants
committed to continuing care provision
friendly design, energy)
– Monitor design and innovation response to
COVID-19
Energy
– Balanced assessment of data &
recommendations obtained from
BREEAM reports
– Increase proportion of leases with “green”
reporting provisions to gather more data
on energy consumption patterns from our
tenants for use in decision-making
– Manager to use toolkit and resources to
progress its net zero journey
Tenants
– Focus on supporting our tenants with COVID-19
recovery, considering further real estate design
enhancements in response
– Invest in fully understanding and responding
to lower-scoring areas from tenant survey
Communities
– Complete re-tenanting initiatives identified
which will benefit long-term care continuity
– Continue to facilitate tenant interaction and
learning sessions as COVID-19 restrictions ease
Governance & transparency
– Undertook director recruitment process
resulting in Mr Niblett being appointed post
year end
Governance & transparency
– To prepare and publish enhanced reporting
suite, inclusive of:
– GRESB reporting following data collection
– Investment Manager successfully applied to
process
become signatory to the FRC Stewardship Code
– Comprehensive sustainability reporting,
– £3 million taxation directly paid to the UK
inclusive of EPRA measures
government by way of VAT and stamp duty land
taxes. Dividends paid of £32 million are
assessed for tax upon reaching shareholders
Annual Report and Financial Statements 2021
21
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information
Risk Report
Principal and
emerging risks
Risk
Description of risk and factors affecting risk rating Mitigation
Poor
performance
of assets
There is a risk that a tenant’s business could
become unsustainable if it fails to trade successfully
and sustain a sufficient rent cover. This could lead
to a loss of income for the Group and an adverse
impact on the Group’s results and shareholder
returns. The strategy of investing in new purpose-
built care homes could lead to additional fill-up risk
and there may be a limited amount of time that
small regional operators can fund start-up losses.
There is also a risk that the effects of COVID-19
may lead to longer fill times before a home
becomes mature.
Tenant diversification across the Group’s
portfolio is an important criteria taken
into consideration before any investment
transaction. Investment decisions are made
with reference to the Investment Manager’s
analysis and projections, based on the local
market dynamics for the home, and the
Investment Manager focuses on ensuring that
rents are set at sustainable levels. Rent deposits
or other guarantees are sought, where
appropriate, to provide additional security for
the Group. As at 30 June 2021, the Group had
a diversified portfolio consisting of 28 tenants.
The Investment Manager has ongoing
engagement with the Group’s tenants to
proactively assist and monitor performance.
The Group is committed to investing in high
quality real estate with high quality operators.
These assets are expected to experience
demand ahead of the sector average while
in the wider market a large number of care
homes without fit-for-purpose facilities are
expected to close. Our tenants are well-versed
in best practice for responding to infection
control and the wider pandemic while the
Investment Manager has been actively
engaged with the tenants in the portfolio
during the outbreak and continues to maintain
good lines of communication.
The Group maintains regular communication
with investors and existing debt providers, and,
with the assistance of its broker and sponsor,
regularly monitors the Group’s capital
requirements and investment pipeline
alongside opportunities to raise both equity
and debt. During the year, the Group has
extended the weighted average term of
its debt facilities (30 June 2021: 4.8 years).
Risk rating
& change
High
High
Medium
Medium
Medium
As a result of the COVID-19 pandemic, there is
a risk that overall demand for care home beds is
reduced causing asset performance to fall below
expectations. While demographic shifts and the
realities of needs-based demand remain intact, and
the rollout of the vaccination programme has been
a positive development, occupancy levels have
fallen across the sector and the speed of recovery
may depend on the prevalence of COVID-19 in
the UK generally, increased levels of resident
admissions by tenants, the availability of booster
vaccines and the efficacy of existing vaccines.
Without access to equity or debt capital, the
Group may be unable to grow through acquisition
of attractive investment opportunities. This is likely
to be driven by both investor demand and lender
appetite which will reflect Group performance,
competitor performance, general market
conditions and the relative attractiveness of
investment in UK healthcare property.
Pandemic
reduces
demand for
care home beds
Availability
of capital
Breach
of REIT
regulations
Changes in
government
policies
22
Target Healthcare REIT plc
A breach of REIT regulations, primarily in relation
to making the necessary level of distributions,
may result in loss of tax advantages derived from
the Group’s REIT status. The Group remains fully
compliant with the REIT regulations and is fully
domiciled in the UK.
The Group’s activities, including the level
of distributions, 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.
Changes in government policies, including those
affecting local authority funding of elderly care,
may render the Group’s strategy inappropriate.
Secure income and property valuations will be at
risk if tenant finances suffer from policy changes.
Whilst the care sector is facing significant
challenges and reform has been mooted by
successive governments, including the recent
introduction of the health and social care levy,
a white paper containing full detail is still awaited.
Government policy is monitored by the Group
to increase the ability to anticipate changes.
The Group’s tenants also typically have a
multiplicity of income sources, with their
business models dependent on government
funding.
Strategic objectives
Risk trend
To grow a
robust portfolio
Dividend
focus
Specialist,
engaged manager
Responsible
investment
Risk
increased
Risk
unchanged
Risk
decreased
Risk
Description of risk and factors affecting risk rating Mitigation
Debt covenant
compliance/
adverse interest
rate fluctuations
Falls in property valuations could adversely affect
the Group’s borrowing capacity which is primarily
linked to the value of its properties. Property
valuations are inherently subjective and can
fluctuate dependent on market conditions.
Similarly, a large increase in market interest rates
would be detrimental to overall returns and may
limit borrowing capacity.
Reliance on
third party
service
providers
The Group is externally managed and, as such,
relies on a number of service providers. Poor quality
service from providers such as the Investment
Manager, company secretary, broker, legal advisers
or depositary could have potentially negative
impacts on the Group’s investment performance,
legal obligations and compliance as well as
shareholder relations.
The Group has a conservative gearing strategy
although net gearing is anticipated to increase
from its level of 15.9% at 30 June 2021 as the
Group nears full investment. Loan covenants
and liquidity levels are closely monitored for
compliance and headroom is projected.
The Group has fixed interest costs on its
£80 million of fixed term borrowings as at
30 June 2021.
The Investment Manager, along with all
other service providers, is subject to regular
performance appraisal by the Board. The
Manager has retained key personnel since the
Group’s IPO and has successfully hired further
skilled individuals and invested in its systems.
The sustained number of years of service from
both the Investment Manager and other key
providers further mitigates this risk.
Risk rating
& change
Medium
Medium
Reduced
availability of
carers, nurses
and other care
home staff
Failure to
differentiate
qualities from
competitors &
to communicate
ESG strategy
Risk to business
continuity from
IT downtime/
loss of data
The combined impacts of the pandemic and Brexit
has reduced the availability of key staff in the care
sector which may result in a reduction in the quality
of care for underlying residents, restrict tenants
from being able to admit residents or result in wage
inflation. Mandatory vaccination for care home staff
and an expected recovery in other sectors, such as
retail or hospitality, that may draw further staff from
the care sector introduces further uncertainties.
The Group is committed to investing in
high quality real estate with high quality
operators and these should be better placed
to attract staff.
Medium
NEW and
EMERGING
The Investment Manager continues to
engage with tenants in the portfolio and to
share examples of best practice in recruitment
and retention of staff.
Failing to differentiate strategy and qualities from
competitors is a significant risk for the business
with increased competition in the healthcare real
estate sector. The failure to communicate
effectively the ESG and sustainable impact qualities
of the Group to investors and other stakeholders
could have a negative impact on future demand
for equity raises and wider reputational damage
as investor groups demand greater participation
in sustainability pledges/disclosures.
The stakeholder communications strategy
of the Group has always been to highlight
the quality of the real estate in which the
Group invests and the ESG KPIs, as set out on
pages 8 and 9, continue to be developed and
improved. The regular production of investor
relations materials (annual and interim reports,
investor presentations and quarterly factsheets)
along with direct engagement with investors
has helped to mitigate this risk.
Medium
The loss of confidential information through a
breach of the Manager’s IT systems could have
a significant detrimental effect on the business
activities of the Group as well as the potential for
financial loss from fraud, breach of GDPR legislation
and reputational damage to the Group. As some
business activities are now being carried out virtually,
there is an increased reliance on the IT systems and
the control environment surrounding them.
The Investment Manager has IT policies and
associated cyber-insurance which mitigate the
potential for loss of data while key data is also
held with other service providers (solicitors,
registrars and depositary). The Group’s control
environment is also assessed annually by a
third party who report to the Board.
Medium
The Company’s risk matrix is reviewed regularly by the Board as detailed on page 43. Emerging risks are identified though regular discussion at
Board meetings of matters relevant to the Company and the sectors in which it operates; including matters that may impact on the underlying
tenant operators. In addition, the Board holds an annual two-day strategy meeting which includes presentations from relevant external parties
to ensure that the Board are fully briefed on relevant matters. At the strategy meeting principal and emerging risks are discussed and reviewed
to ensure that they have all been appropriately identified and, where necessary, addressed.
The detailed consideration of the Company’s viability and its continuation as a going concern, including sensitivity analysis to address the
appropriate risks, is set out on pages 32 and 33.
Annual Report and Financial Statements 2021
23
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Section 172 Statement
Promoting the success of
Target Healthcare REIT plc
The Board considers that it has made decisions during the year which will promote
the success of the Group for the benefit of its members as a whole.
This section, which serves as the Company’s section 172 statement, explains how the Directors have had regard to the
matters set out in section 172(a)-(f) of the Companies Act 2006 for the financial year to 30 June 2021, taking into account
the likely long-term consequences of decisions and the need to foster relationships with all stakeholders in accordance
with the AIC Code.
a) The likely consequences of any
decision in the long term
Our investment approach is long-term with an average lease length of 28.8 years. We believe this is
the most responsible approach to provide stability and sustainability to tenants and key stakeholders.
Therefore, most decisions require consideration of long-term consequences, from determining a
sustainable rent level and the right tenant partner for each investment, to considering the impact
of debt and key contracts with service providers on the recurring earnings which support dividends
to shareholders.
b) The interests of the Company’s
The Company is externally managed and therefore has no employees.
employees
c) The need to foster the Company’s
business relationships with
suppliers, customers and others
As a REIT with no employees, the Board works in close partnership with the Manager, which runs
the Group’s operations and portfolio within parameters set by the Board and subject to appropriate
oversight. The Manager has deep relationships with tenants, the wider care home sector, and many
of the Group’s other suppliers. These are set out in more detail in the following table.
d) The impact of the Company’s
operations on the community and
the environment
The Board is confident the Group’s approach to investing in a sensitive sector is responsible with
regard to social and environmental impact. This is set out in more detail in the community and the
environment section of the table on the following page.
e) The desirability of the Company
maintaining a reputation for high
standards of business conduct
The Board requires high standards of itself, service providers and stakeholders. The Group’s
purpose and investment objectives dictate that these standards are met in order to retain credibility.
The ethos and tone is set by the Board and the Manager.
f) The need to act fairly as between
members of the Company
The Board encourages an active dialogue with shareholders to ensure effective communication,
either directly or via its broker and/or Manager. The interests of all shareholders are considered
when issuing new shares.
The significant transactions where the interests of stakeholders were actively considered by the Board during the year were:
Dividends paid
The Board recognised the importance of
dividends to its shareholders and, after careful
analysis of the Group’s forecast cash position
and expected rental collection, concluded
that continuing dividend payments at the
level announced in the Annual Report 2020
remained in the interests of all stakeholders.
With rental collection remaining robust, the
Company recently announced an increase
in the expected dividend level, barring
unforeseen circumstances, for the year
ending 30 June 2022.
Ongoing investment and
asset management activity
Following a short hiatus towards the end
of the previous financial year, the Group
recommenced its investment activity in
July 2020. Progress was made in resolving
a position with a distressed tenant with a
24
Target Healthcare REIT plc
settlement agreed, a re-tenanting completed,
and limited rent concessions were granted,
ensuring on each occasion that the
transactions agreed appropriately balanced
the interest of shareholders, tenants (both
incoming and outgoing) and the underlying
residents of the relevant care homes.
Appointment of a Director
Subsequent to the year end, as part of
the Board succession plan, Mr Niblett was
appointed as a Director. Mr Niblett’s significant
financial experience and expertise is expected
to benefit all stakeholders over the period of
his appointment.
Capital financing
During the year, the Group refinanced its loan
facilities with the Royal Bank of Scotland
and HSBC Bank, extending the term and
increasing the quantum of each on terms that
are expected to be beneficial to significant
stakeholders over the duration of the facilities.
The Company also issued £60 million of
ordinary shares, at a premium to NAV, in
March 2021 and a further £125 million post
year end. The equity raised was used to
temporarily repay some of the Group’s
loan facilities whilst it awaited investment.
Stakeholders
The Company is a REIT and has no executive directors or employees and is governed by the Board of Directors. Its main stakeholders are
shareholders, tenants and their underlying residents, debt providers, the Investment Manager, other service providers and the community and
the environment. The Board considers the long-term consequences of its decisions on its stakeholders to ensure the long term sustainability
of the Company.
Shareholders
Shareholders are key stakeholders and the Board proactively seeks the views of its shareholders and
places great importance on communication with them.
Tenants and underlying residents
Debt providers
Investment Manager
Other service providers
Community and the environment
The Board reviews the detail of significant shareholders and recent movements at each Board Meeting
and receives regular reports from the Investment Manager and Broker on the views of shareholders, and
prospective shareholders, as well as updates on general market trends and expectations. The Chairman
and other Directors make themselves available to meet shareholders when required to discuss the
Group’s business and address shareholder queries. Whilst government guidelines prevented the holding
of a physical AGM during the year, provisions were made for any questions to be raised with the Board
by email in advance of the meeting.
The Company and Investment Manager also provide regular updates to shareholders and the market
through the Annual Report, Interim Report, regular RNS announcements (including the quarterly NAV),
quarterly investor reports and the Company’s website. The Investment Manager will also meet with
analysts and members of the financial press.
As set out in more detail on pages 6 to 7 and 16 to 17, the Investment Manager liaises closely with
tenants to understand their needs, and those of their underlying residents, through visits to properties
and regular communication with both care home personnel and senior management of the tenant
operators. The effectiveness of this engagement is assessed through an annual survey.
The Investment Manager also receives, and analyses, management information provided by each tenant
at least quarterly and regularly monitors the CQC, or equivalent, rating for each home and any online
reviews. Any significant matters are discussed with the tenant and included within the Board reporting.
The Group has term loan and revolving credit facilities with the Royal Bank of Scotland plc, HSBC Bank
plc and ReAssure Limited (see note 14 to the Consolidated Financial Statements for more information).
The Company maintains a positive working relationship with each of its lenders and provides regular
updates, at least quarterly, on portfolio activity and compliance with its loan covenants in relation to
each loan facility.
The Investment Manager has responsibility for the day-to-day management of the Group pursuant to
the Investment Management Agreement. The Board, and its committees, are in regular communication
with the Investment Manager and receive formal presentations at every Board Meeting to aid its
oversight of the Group’s activities and the formulation of its ongoing strategy.
The Board, through the Management Engagement Committee, formally reviews the performance of
the Investment Manager, the terms of its appointment and the quality of the other services provided at
least annually. Further details on this process and the conclusions reached in relation to the year ended
30 June 2021 are contained on page 39.
The Board, through the Management Engagement Committee, formally reviews the performance of
each of its significant service providers at least annually. The reviews will include the Company’s legal
advisers, brokers, tax advisers, auditors, depositary, valuers, company secretary, insurance broker,
surveyors and registrar. The purpose of the review is to ensure that the quality of the service provided
remains of the standard expected by the Board and that overall costs and other contractual
arrangements remain in the interests of the Group and other significant stakeholders. The Investment
Manager also reports regularly to the Board on these relationships.
The significant other service providers, particularly the Group’s legal advisers and brokers, will be invited
to attend Board Meetings and report directly to the Directors where appropriate.
The Group’s principal non-financial objective is to generate a positive social impact for the end-users of
its real estate. Investment decisions are made based on the fundamental premise that the real estate is
suitable for its residents, the staff who care for them, and their friends, families and local communities,
both on original acquisition and for the long-term.
Environmental considerations are an integral part of the acquisition and portfolio management process,
given the strategy of only acquiring modern buildings which benchmark well from an energy efficiency
aspect. The Group’s ESG strategy is currently prioritising the gathering of useful energy/consumption
data on our portfolio which will be used to align the portfolio appropriately with benchmarks over the
medium and longer term.
Annual Report and Financial Statements 2021
25
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Board of Directors
Our experienced and knowledgeable Board are responsible for
the effective stewardship of the Company.
MALCOLM NAISH
Independent Non-Executive Chairman
PROFESSOR JUNE ANDREWS OBE
Independent Non-Executive Director
GORDON COULL
Independent Non-Executive Director
and Chair of Audit Committee
Mr Naish has chaired the Company since its
launch in 2013, and also has listed Company
Board experience via his current role as a
non-executive director of GCP Student Living plc
and, until March 2021, his former role as
chairman of Ground Rents Income Fund plc.
Mr Naish has over 45 years of real estate
experience, having qualified as a Chartered
Surveyor in 1976, most recently from his role as
Head of Property at Scottish Widows Investment
Partnership (‘SWIP’) from 2007 to 2012 where
he had responsibility for a multi-billion pound
portfolio of commercial property assets.
Mr Naish was chairman of the Scottish Property
Federation for 2010/11 and holds a number of
advisory roles in the private and charity sectors.
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 and is on
the board of the Scottish Legal Complaints
Commission.
Mr Coull has served as Chair of the Audit
Committee since the Group’s launch in 2013,
and also has Board experience as a former
non-executive director of Cornelian Asset
Managers group until early 2020 and as a
former member of the audit committee of the
Universities Superannuation scheme, one of the
UK’s largest pension funds.
Mr Coull is a qualified chartered accountant
and, prior to his retirement in 2011, was a senior
partner in the financial services practice of Ernst
& Young LLP. As an audit and advisory partner he
specialised in asset management, working with
a range of asset managers and their funds, both
in the UK and Europe.
ALISON FYFE
THOMAS HUTCHISON III
VINCE NIBLETT
Independent Non-Executive Director
Independent Non-Executive Director and
Independent Non-Executive Director
and Chair of Nomination and
Remuneration Committees
Senior Independent Director
Ms Fyfe is a highly experienced property
Mr Hutchison has significant experience within
Mr Niblett has many years of financial and
professional with 35 years of experience in
real estate operations and investment, having
commercial experience having been the Global
surveying, banking and property finance. Having
held senior executive roles across each of the
Managing Partner Audit for Deloitte. He held a
trained and worked as a commercial surveyor
senior housing, hotels, hospitality and financial
number of senior leadership roles within Deloitte
with Knight Frank in both London and Edinburgh,
services sectors. Mr Hutchison is the principal
including as a member of the UK Board of
she joined the Royal Bank of Scotland in 1996 to
founder of Legacy Hotel Advisors, LLC and
Partners and of the Global Executive Group and
specialise in property finance. Over a period of
Legacy Healthcare Properties, LLC where he
the UK Executive Group before his retirement
19 years with the bank she fulfilled several senior
served as the chairman of both companies. He
from Deloitte in May 2015. During his career at
property finance roles, ultimately serving for five
held several key executive positions over a seven-
Deloitte, Mr Niblett served some of the firm’s
years as Head of Real Estate Restructuring in
year period at CNL Financial Group, Inc. – one of
most significant public company clients, working
Scotland before leaving the bank in 2015. She
the largest, privately held real estate investment
with them on commercial and strategic issues as
has subsequently acted as a director of a number
and finance companies in the US. Mr Hutchison
well as providing audit services.
of companies in the property and debt finance
is currently a director for Hersha Hospitality Trust,
sectors whilst also continuing to undertake
Marriott Vacations Worldwide Corporation,
Mr Niblett is an independent non-executive
property finance consultancy work. In August
Trinity Forum Europe and Alexander Arms
director and chairman of the audit committee of
2021, she was elected as a Governing Board
and is a former director for ClubCorp, Inc.
Member of Hillcrest Homes (Scotland).
Forterra plc and an independent non-executive
director and senior independent director of Big
Mr Hutchison is also a member of The Real
Yellow Group plc. He also serves as a trustee of
Ms Fyfe is a member of the Royal Institution of
Estate Roundtable and the Leadership Council
the Ruth Strauss Foundation.
Chartered Surveyors, a member of the Investment
for Communities in Schools. He serves as a
Property Forum and a former Policy Board
senior adviser to various service industry
member of the Scottish Property Federation.
public companies.
Date of appointment
30 January 2013
Country of residence
UK
Independent
Yes
Other public company directorships
GCP Student Living Plc
Committee Membership
30 January 2013
30 January 2013
01 May 2020
30 January 2013
25 August 2021
UK
Yes
None
UK
Yes
None
UK
Yes
None
United States of America
Yes
None
Investment Committee (Chair)
Management Engagement Committee (Chair)
Nomination Committee
Audit Committee
Remuneration Committee
Audit Committee
Investment Committee
Nomination Committee
Management Engagement Committee
Remuneration Committee
Audit Committee (Chair)
Investment Committee
Management Engagement Committee
Nomination Committee
Remuneration Committee
Remuneration Committee (Chair)
Nomination Committee (Chair)
Audit Committee
Investment Committee
Management Engagement Committee
Audit Committee
Investment Committee
Nomination Committee
Remuneration Committee
Management Engagement Committee
Management Engagement Committee
UK
Yes
Big Yellow Group plc
Forterra plc
Audit Committee
Investment Committee
Nomination Committee
Remuneration Committee
26
Target Healthcare REIT plc
MALCOLM NAISH
PROFESSOR JUNE ANDREWS OBE
GORDON COULL
Independent Non-Executive Chairman
Independent Non-Executive Director
Independent Non-Executive Director
and Chair of Audit Committee
Mr Naish has chaired the Company since its
Professor Andrews is a Fellow of the Royal
Mr Coull has served as Chair of the Audit
launch in 2013, and also has listed Company
College of Nursing and a world-renowned
Committee since the Group’s launch in 2013,
Board experience via his current role as a
dementia specialist. She set up and directed
and also has Board experience as a former
non-executive director of GCP Student Living plc
the Centre for Change and Innovation in the
non-executive director of Cornelian Asset
and, until March 2021, his former role as
Scottish Executive Health Department and
Managers group until early 2020 and as a
chairman of Ground Rents Income Fund plc.
was the director of the Dementia Services
former member of the audit committee of the
Development Centre at the University of Stirling.
Universities Superannuation scheme, one of the
Mr Naish has over 45 years of real estate
Professor Andrews is a former trade union leader,
UK’s largest pension funds.
experience, having qualified as a Chartered
NHS manager and senior civil servant and is on
Surveyor in 1976, most recently from his role as
the board of the Scottish Legal Complaints
Mr Coull is a qualified chartered accountant
Head of Property at Scottish Widows Investment
Commission.
and, prior to his retirement in 2011, was a senior
partner in the financial services practice of Ernst
& Young LLP. As an audit and advisory partner he
specialised in asset management, working with
a range of asset managers and their funds, both
in the UK and Europe.
ALISON FYFE
Independent Non-Executive Director
and Chair of Nomination and
Remuneration Committees
THOMAS HUTCHISON III
Independent Non-Executive Director and
Senior Independent Director
VINCE NIBLETT
Independent Non-Executive Director
Ms Fyfe is a highly experienced property
professional with 35 years of experience in
surveying, banking and property finance. Having
trained and worked as a commercial surveyor
with Knight Frank in both London and Edinburgh,
she joined the Royal Bank of Scotland in 1996 to
specialise in property finance. Over a period of
19 years with the bank she fulfilled several senior
property finance roles, ultimately serving for five
years as Head of Real Estate Restructuring in
Scotland before leaving the bank in 2015. She
has subsequently acted as a director of a number
of companies in the property and debt finance
sectors whilst also continuing to undertake
property finance consultancy work. In August
2021, she was elected as a Governing Board
Member of Hillcrest Homes (Scotland).
Ms Fyfe is a member of the Royal Institution of
Chartered Surveyors, a member of the Investment
Property Forum and a former Policy Board
member of the Scottish Property Federation.
Mr Hutchison has significant experience within
real estate operations and investment, having
held senior executive roles across each of the
senior housing, hotels, hospitality and financial
services sectors. Mr Hutchison is the principal
founder of Legacy Hotel Advisors, LLC and
Legacy Healthcare Properties, LLC where he
served as the chairman of both companies. He
held several key executive positions over a seven-
year period at CNL Financial Group, Inc. – one of
the largest, privately held real estate investment
and finance companies in the US. Mr Hutchison
is currently a director for Hersha Hospitality Trust,
Marriott Vacations Worldwide Corporation,
Trinity Forum Europe and Alexander Arms
and is a former director for ClubCorp, Inc.
Mr Hutchison is also a member of The Real
Estate Roundtable and the Leadership Council
for Communities in Schools. He serves as a
senior adviser to various service industry
public companies.
Mr Niblett has many years of financial and
commercial experience having been the Global
Managing Partner Audit for Deloitte. He held a
number of senior leadership roles within Deloitte
including as a member of the UK Board of
Partners and of the Global Executive Group and
the UK Executive Group before his retirement
from Deloitte in May 2015. During his career at
Deloitte, Mr Niblett served some of the firm’s
most significant public company clients, working
with them on commercial and strategic issues as
well as providing audit services.
Mr Niblett is an independent non-executive
director and chairman of the audit committee of
Forterra plc and an independent non-executive
director and senior independent director of Big
Yellow Group plc. He also serves as a trustee of
the Ruth Strauss Foundation.
30 January 2013
30 January 2013
01 May 2020
30 January 2013
25 August 2021
UK
Yes
None
UK
Yes
None
United States of America
Yes
None
UK
Yes
Big Yellow Group plc
Forterra plc
Audit Committee
Investment Committee
Nomination Committee
Audit Committee (Chair)
Investment Committee
Management Engagement Committee
Management Engagement Committee
Remuneration Committee
Nomination Committee
Remuneration Committee
Remuneration Committee (Chair)
Nomination Committee (Chair)
Audit Committee
Investment Committee
Management Engagement Committee
Audit Committee
Investment Committee
Management Engagement Committee
Nomination Committee
Remuneration Committee
Audit Committee
Investment Committee
Management Engagement Committee
Nomination Committee
Remuneration Committee
Partnership (‘SWIP’) from 2007 to 2012 where
he had responsibility for a multi-billion pound
portfolio of commercial property assets.
Mr Naish was chairman of the Scottish Property
Federation for 2010/11 and holds a number of
advisory roles in the private and charity sectors.
Date of appointment
30 January 2013
Country of residence
UK
Yes
Independent
Other public company directorships
GCP Student Living Plc
Committee Membership
Investment Committee (Chair)
Management Engagement Committee (Chair)
Nomination Committee
Audit Committee
Remuneration Committee
UK
Yes
None
Annual Report and Financial Statements 2021
27
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Investment Manager
Specialists in the sector
The Investment Manager
The Group has appointed Target Fund Managers Limited (‘Target’ or the ‘Investment Manager’) as its investment manager pursuant to the
Investment Management Agreement. The Investment Manager is a limited company 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 Group’s AIFM and Target has received FCA approval to act as AIFM of the Group. An additional requirement
of the AIFMD is for the Group to appoint a depositary, which oversees the property transactions and cash arrangements and other AIFMD
required depositary responsibilities. The Board has appointed IQ EQ Depositary Company (UK) Limited to act as the Company’s depositary.
Key personnel of the Investment Manager
The key personnel who are responsible for managing the Group’s activities are:
Kenneth MacKenzie MA CA
Kenneth MacKenzie is the founder and
Chief Executive of Target. He is a Chartered
Accountant with over 40 years of business
leadership experience with the last fifteen in
healthcare. In addition to his responsibilities
as Target’s chief executive, Kenneth leads the
creation and management of Target’s client
funds and oversees fundraising and investor
liaison for the Group. 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. 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 Head of Investment at
Target. He is a Chartered Accountant with
over 20 years’ experience, the last fifteen
of which have been in real estate investment
management. He has primary responsibility
for investment activity across the Target
business. John has been involved in the
appraisal of several hundred care home
opportunities resulting in the acquisition of
circa 100 properties for those client funds.
Prior to joining Target, during his time as
investment director for an institutional
investor, John held board positions at a
UK top-10 care home operator and a care
home development business. 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 Head of Healthcare at
Target. His primary responsibilities include
inspecting properties owned by Target’s
client funds as well as prospective
acquisitions during due diligence. Target’s
in-house demographic and market analysis
is performed by his team. Andrew has spent
most of his life in the senior care sector.
Prior to his current role, 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.
28
Target Healthcare REIT plc
Scott Steven MA
Scott Steven is Head of Asset Management
at Target. Scott joined Target in 2017 from
Lloyds Banking Group. Prior to joining Target,
Scott had been responsible for a portfolio of
Lloyds Banking Group’s loans to large
property groups, including care home
owners and operators. During 2018, Scott
took over the Head of Asset Management
role at Target, and holds responsibility for
tenant engagement and portfolio decision-
making with a team of healthcare and asset
management professionals.
Gordon Bland BAcc CA
Gordon Bland is Finance Director at Target.
He is a Chartered Accountant with extensive
experience of financial reporting within the
asset management industry. He provides
financial input to the strategic and
commercial activities of the senior team,
and leads the finance function where his key
responsibilities include: financial planning and
analysis; risk management; ownership of
relationships with debt providers, Treasury
services; and financial reporting to
Shareholders. Gordon previously worked
at PricewaterhouseCoopers for almost ten
years, serving asset management and
financial services clients in the UK, Canada
and Australia.
Donald Cameron BCom CA
Donald Cameron is Company Secretary
and Director of Financial Reporting at Target.
He is a Chartered Accountant with more than
15 years’ experience of financial reporting
and company secretarial services within the
closed-ended investment company sector.
Having originally qualified with Deloitte LLP,
he then worked for over ten years in the
Investment Trust Company Secretarial team
at F&C Asset Management (now known as
BMO Asset Management), acting for both
property and equity investment companies.
He is responsible for providing company
secretarial services to the Board and for
statutory financial reporting. He joined Target
in 2019, having provided similar services to
the Group for over three years whilst working
for Maitland Group, a third-party provider of
corporate secretarial and administration
services.
Annual Report and Financial Statements 2021
29
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Directors’ Report
The Directors present their report, along with the financial statements of the Group and Company on pages 56 to 86, for the year ended
30 June 2021.
The Directors consider that, following advice from the Audit Committee, the Annual Report and Consolidated Financial Statements taken
as a whole are fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position,
performance, business model and strategy. The Audit Committee has reviewed the Annual Report and Consolidated Financial Statements
for the purpose of this assessment. In reaching this conclusion, the Directors have assumed that the reader of the Annual Report and
Consolidated Financial Statements would have a reasonable level of knowledge of the investment industry in general and Real Estate
Investment Trusts in particular. The outlook for the Group can be found in the Chairman’s Statement on pages 4 and 5 and the Investment
Manager’s Report on pages 12 and 13. Principal and emerging risks and uncertainties can be found on pages 22 and 23 with further
information in note 17 to the Consolidated Financial Statements.
Results and dividends
The results for the year are set out in the following Consolidated Financial Statements. The Group has paid four quarterly interim dividends,
each of 1.68 pence per share, to shareholders in relation to the year ended 30 June 2021. Details of the dividends paid are set out in note 7
to the Consolidated Financial Statements.
The Company
The Company is registered as a Public Limited Company in terms of the Companies Act 2006 (Registered number: 11990238) and is an
investment company under section 833 of the Companies Act 2006.
The Group carries on business as a Real Estate Investment Trust and has been approved as such by HM Revenue & Customs (‘HMRC’), subject
to it continuing to meet the relevant eligibility conditions and ongoing requirements. As a result, the profits of the Group’s property rental
business, comprising both income and capital gains, are exempt from UK taxation. The Company intends to conduct its affairs so as to enable
it to continue to comply with the requirements.
The Target Healthcare REIT group was originally established in March 2013 and, following a scheme of arrangement to introduce a parent
company to the Group that was incorporated in the United Kingdom, the Company became the parent company of the Group in August
2019. The Company’s shares have been admitted to the premium segment of the Official List of the UK Listing Authority and to trading on
the Main Market of the London Stock Exchange.
The Company is a member of the Association of Investment Companies (the ‘AIC’) and the European Public Real Estate Association (‘EPRA’).
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 fully 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 Group 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.
30
Target Healthcare REIT plc
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 25 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.
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. 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.
Directors
Biographical details of the Directors, all of whom are non-executive, can be found on pages 26 and 27. As explained in more detail in the Corporate
Governance Statement on page 39, any new appointment by the Board is subject to election by shareholders at the Annual General Meeting
(‘AGM’) following the appointment. Thereafter the Board has agreed that all Directors will retire annually and, if appropriate, seek re-election.
The Directors of the Company at 30 June 2021 were each re-elected at the AGM held on 2 December 2020. Other than Professor Andrews
and Mr Hutchison, who intend to step down from the Board at the conclusion of the forthcoming AGM in line with the Board’s succession
plan, each of these Directors will seek annual re-election at the AGM to be held on 14 December 2021. Mr Niblett was appointed to the Board
with effect from 25 August 2021 and will be subject to election by shareholders at the forthcoming AGM.
In relation to the appointment of Mr Niblett, the Group appointed Odgers Berndtson to provide external search consultancy services for which they
received a fee of £45,000 (plus VAT). Neither the Company nor any of the individual Directors has any other connection with Odgers Berndtson.
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. However, recognising that consideration should be given to
the length of service of the Board as a whole, and that its membership should be regularly refreshed, the Board is continuing to implement
its succession plan.
It is currently anticipated that two of the four original Directors, Mr Hutchison and Professor Andrews, will not stand for re-election at the
forthcoming AGM, and the Board would like to take the opportunity to thank them for their committed service and expert guidance over
the period since the Group’s launch in 2013. Following the retirement of Mr Hutchison, Mr Coull will assume the role of Senior Independent
Director and Mr Niblett, who was recently appointed to the Board, will assume the additional role of chair of the Audit Committee. Noting the
skills gap on the Board that will arise from the retirement of Professor Andrews and Mr Hutchison, it is intended that a Director with suitable
experience will be appointed in the near term. The recruitment process in relation to this appointment has commenced, with a recruitment
consultant, Nurole, having been engaged. The process of recruitment is expected to be similar to that followed in relation to the appointment
of Mr Niblett, as described on page 40.
It is further intended that two additional appointments will be made to the Board over the course of the following year and, provided this is
achieved, it is anticipated that Mr Naish and Mr Coull will retire at the AGM in November 2022. However, due to the continuing uncertainties
arising from the COVID-19 pandemic, which the Directors believe increases the importance of stability and continuity of experience on the
Board, it is possible that this proposed rotation of the Board may be staggered over a longer time period. The Board intends to continue to use
the services of external search consultants to assist in the identification of suitable candidates. Further details on the Board’s policy in relation
to diversity and tenure can be found on page 39.
The Directors consider that continuity and experience on the Board remains important and therefore, whilst the long-term intention is for the
Board to consist of no more than five Directors, this number may be temporarily exceeded over the period of succession in order to provide
a period of overlap during which the corporate knowledge and experience of the retiring Directors can be passed on, subject to the overall
level of Directors’ fees remaining within the limit determined by the Company’s Articles.
The Board confirms that, following the evaluation process set out in the Corporate Governance Statement on page 40 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 Director 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.
Capital Structure and Voting Rights
Details of the Company’s share capital are set out in note 16 to the Consolidated Financial Statements. Details of voting rights are also
set out in the Notes to the Notice of Annual General Meeting. There are no significant restrictions concerning the transfer of securities
in the Company (other than certain restrictions imposed by laws and regulations such as insider trading laws); no agreements known to
the Company concerning restrictions on the transfer of securities in the Company or on voting rights; and no special rights with regard
to control attached to securities. There are no significant agreements which the Company is a party to that might be affected by a change
of control of the Company following a takeover bid, provided following such bid the Company’s shares continue to be traded on the main
market of the London Stock Exchange.
The Group’s borrowings are detailed in note 14 to the Consolidated Financial Statements.
Annual Report and Financial Statements 2021
31
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Directors’ Report continued
Substantial Interests in Share Capital
As at 30 June 2021, the Company had received notification of the following holdings of voting rights (under the Financial Conduct Authority’s
Disclosure Guidance and Transparency Rules):
Baillie Gifford & Co
Premier Miton Group plc
Alder Investment Management Limited
Investec Wealth & Investment Limited
CCLA Investment Management Limited
Rathbone Investment Management Limited
* Based on 511,541,694 ordinary shares in issue as at 30 June 2021.
Number of
Ordinary Shares
held
25,601,878
24,348,972
23,681,156
23,385,150
17,918,605
17,462,203
Percentage held*
5.0
4.8
4.6
4.6
3.5
3.4
As at 19 October 2021, the Company has been notified that Baillie Gifford & Co has reduced its holding of voting rights below the disclosable
level. The Company has not received notification of any other changes in the holdings of voting rights (under the Financial Conduct
Authority’s Disclosure Guidance and Transparency Rules) compared with those above.
Share issuance and share buybacks
At the Annual General Meeting held on 2 December 2020, shareholders granted authority for the Company to issue up to 45,748,764 ordinary
shares on a non pre-emptive basis for cash. This equated to 10% of the shares in issue at the time of passing of the resolution. As at 19 October
2021, the Company has issued 12,749,706 shares under this authority. The remaining authority to issue up to a further 32,999,058 ordinary
shares expires on the earlier of the conclusion of the forthcoming AGM, which is expected to be held on 14 December 2021, or 2 March 2022.
It is expected that the Company will continue to seek this authority on an annual basis.
At the General Meeting held on 1 March 2021, shareholders granted authority for the Company to issue up to a further 150 million ordinary
shares in connection with an Initial Placing, Offer for Subscription, Intermediaries Offer and Placing Programme as described in the prospectus
published on 12 February 2021, without first offering them to existing shareholders in proportion to their existing holdings. As at 30 June 2021,
the Company had issued a total of 54,054,054 ordinary shares under this authority at a price of 111.0 pence per ordinary share. In September
2021, the Company issued the 95,945,946 ordinary shares remaining under this authority at a price of 115.0 pence per ordinary share.
At the Annual General Meeting held on 2 December 2020, shareholders granted authority for the Company to buy back up to 68,577,397
ordinary shares for cancellation or for holding in treasury. The Company did not buy back any shares under this authority, which will expire
at the conclusion of the forthcoming AGM.
Statement of Disclosure of Information to Auditor
As far as the Directors are aware, there is no relevant audit information of which the Group’s auditor is unaware, and each Director has taken
all the steps that he or she ought to have taken as a Director in order to make himself or herself aware of any relevant audit information and
to establish that the Group’s auditor is aware of that information.
Continuation Vote
In accordance with the Company’s Articles of Association, an ordinary resolution is required to be put to shareholders at the AGM to be held
in 2022 and at every fifth annual general meeting thereafter to seek their approval to the continuation of the Company.
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; taking into consideration
the potential impact of COVID-19 on both the Group and any increase in the likelihood that the tenants of its investment properties will not be
able to meet their contractual rental obligations on a timely basis. The Group has agreements relating to its borrowing facilities with which it has
complied during the year and the Board has considered the ability of the Group to repay, refinance or increase these facilities on, or before, their
expected maturity date. The Directors have also considered the issue of ordinary shares in September 2021, which raised gross proceeds of
£125 million, and the pipeline of investment opportunities. Based on all the information considered, the Directors believe that the Group has
the ability to meet its financial obligations as they fall due to 31 December 2022, which is 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.
Viability Statement
The AIC Code requires the Board to assess the Group’s prospects, including a robust assessment of the emerging and principal risks facing the
Group including those that would threaten its business model, future performance, solvency or liquidity. This assessment is undertaken with
the aim of stating that the Directors have a reasonable expectation that the Group will continue in operation and be able to meet its liabilities
as they fall due over the period of their assessment.
The Board has conducted this review over a five-year time horizon, which is a period thought to be appropriate for a company investing in
UK care homes with a long-term investment outlook. At each Board Meeting, the Directors consider the key outputs from a detailed financial
model covering a similar five year rolling period, as this is considered the maximum timescale over which the performance of the Group can
be forecast with a reasonable degree of accuracy. The Group has a property portfolio at 30 June 2021 which has long leases and a weighted
average unexpired lease term of 28.8 years. The Group has borrowings of £130.0 million, on which the interest rate has been fixed, either
directly or through the use of interest rate swaps, on £80.0 million at 2.98 per cent per annum (excluding the amortisation of arrangement
costs), and the remaining £50.0 million carries interest at SONIA plus a weighted margin of 2.17 per cent per annum (excluding the
amortisation of arrangement costs). The Group has access to a further £90.0 million of available debt under committed loan facilities.
32
Target Healthcare REIT plc
The Group’s committed loan facilities have staggered expiry dates with £100.0 million being committed to 5 November 2023, £70.0 million
to 5 November 2025 and £50.0 million to 12 January 2032. Discussions with existing and/or new potential lenders do not indicate any issues
with re-financing and/or increasing the quantum of these loans on acceptable terms in due course.
The Directors’ assessment of the Group’s principal risks are highlighted on pages 22 and 23. The most significant risks identified as relevant
to the viability statement were those relating to:
– Poor performance of assets. The risk that a tenant is unable to sustain a sufficient rental cover, leading to a loss of rental income for
the Group;
– Pandemic reduces demand for care home beds. The risk that overall demand for care home beds is reduced resulting in a decline
in the capital and/or income return from the property portfolio;
– Reduced availability of care home staff. The risk that unavailability of staff restricts the ability of tenants to admit residents or results
in significant wage cost inflation, impacting on the tenant’s rental cover and leading to a loss of rental income for the Group; and
– Debt finance. The risk that falls in property valuations or rental income from the portfolio reduce the Group’s borrowing capacity,
or that an increase in interest rates reduces net returns.
In assessing the Group’s viability, the Board has considered the key outputs from a detailed model of the Group’s expected cashflows over the
coming five years under both normal and stressed conditions. The stressed conditions, which were intended to represent severe but plausible
scenarios, included modelling increases in interest rates, movements in the capital value of the property portfolio and a significant default on
rental receipts from the Group’s tenants. The stressed level of default from the Group’s tenants assumed in the financial modelling was based
on a detailed assessment of the financial position of each individual tenant or tenant group, the structure in place to secure rental income
(such as the strength of tenants’ balance sheets, rental guarantees in place or rental deposits held) and included consideration of the financial
impact on each tenant from the COVID-19 pandemic.
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.
Significant votes against previous resolutions
The Board notes that, although a special resolution in relation to the amendment of the Company’s Articles of Association was passed at the
AGM held on 2 December 2020 with 78.6 per cent of the votes cast being in favour, a significant number of votes were lodged against this
resolution. This amendment was primarily to permit the Company to hold shareholder meetings on a virtual basis whereby shareholders are
not required to attend the meeting in person at a physical location but may instead attend and participate using electronic means.
The Board engaged in consultation with some shareholders who together accounted for a significant proportion of the votes cast against
the resolution. These shareholders had expressed concern that, in theory, the structure of virtual-only meetings could prevent meaningful
shareholder engagement and allow management to more easily avoid difficult questions. In order to address such concerns, the Board
confirmed at the time of the AGM, and re-iterates, its commitment to enabling shareholder attendance at meetings wherever possible and
that it does not intend to restrict the ability of shareholders to physically attend shareholder meetings, except in limited situations such as
where travel or congregation in a physical location at the date of the meeting is forecast to be difficult, dangerous or otherwise restricted
by government guidance or legislation.
Resolutions to be proposed at the AGM
Directors’ remuneration report
The Directors’ remuneration policy and annual report, which can be found on pages 47 to 49, provide detailed information on the
remuneration arrangements for the Directors of the Company. Included is the Directors’ Remuneration Policy which shareholders approved
at the AGM in November 2019 and which will again be put to shareholders at the AGM in 2022. Shareholders are requested to approve the
Directors’ Annual Report on Directors’ Remuneration for the year ended 30 June 2021 (resolution 2).
Dividend policy
The Company’s dividend policy is set out on page 31. In order to be able to continue paying a consistent dividend on a regular basis, and to
ensure that sufficient distributions are made to meet the Company’s REIT status, the Company intends to continue to pay all dividends as
interim dividends. Recognising that this means that shareholders will not have the opportunity to vote on a final dividend, the Company will
instead propose a non-binding resolution to approve the Company’s dividend policy at the AGM (resolution 3). The Directors anticipate that
such non-binding resolution to approve the Company’s dividend policy will be proposed annually.
Auditor
The Independent Auditor’s Report can be found on pages 50 to 55. Ernst & Young LLP (‘EY’) has indicated its willingness to continue in office
and a resolution will be proposed at the AGM to re-appoint EY as Auditor until the conclusion of the AGM to be held in 2022 (resolution 4).
A separate resolution will be proposed to authorise the Directors to determine the Auditor’s remuneration (resolution 5).
Election of Directors
As explained in more detail on page 39, each Director is subject under the Articles to election by shareholders at the AGM following the
appointment and, by policy of the Board, by annual re-election thereafter. Resolutions 6 to 9 therefore propose each of the relevant Directors
for election/re-election. The biographies of each of the Directors, which include the skills and experience each Director brings to the Board
for the long-term sustainable success of the Company, are detailed on pages 26 and 27. Having considered the knowledge, experience
and contribution of each Director putting themselves forward the Board has no hesitation in recommending their election/re-election
to shareholders.
Annual Report and Financial Statements 2021
33
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Directors’ Report continued
Resolutions to be proposed at the AGM continued
Share Issuance Authority
The Directors are seeking authority to allot additional new shares which would not require the publication of a prospectus. Resolution 10 will,
if passed, authorise the Directors to allot new shares of £0.01 each up to an aggregate nominal amount representing 10% of the issued shares
at the date of the passing of resolution 10. Based on the shares in issue at 19 October 2021, this resolution would therefore authorise the
Directors to allot up to 62,023,734 ordinary shares.
In accordance with the provisions of the Company’s Articles of Association and the Listing Rules, the directors of a premium listed company
are not permitted to allot new shares (or grant rights over shares) for cash at a price below the net asset value per share of those shares
without first offering them to existing shareholders in proportion to their existing holdings. Resolution 11, which is a special resolution, seeks
to provide the Directors with the authority to issue shares of £0.01 each 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 aggregate nominal amount representing
10% of the issued ordinary share capital of the Company at the date of the passing of resolution 11.
The authorities granted under resolutions 10 and 11 will expire at the conclusion of the next AGM of the Company after the passing of the
resolutions, expected to be held in November 2022, or on the expiry of 15 months from the passing of the resolutions, unless they are
previously renewed, varied or revoked. It is expected that the Company will seek these authorities on an annual basis. The authorities sought
under resolutions 10 and 11 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 shareholders as a whole to do so.
Authority to Buyback Ordinary Shares
Given the Company is engaged in growth, subject to market conditions, it is unlikely that the Directors will buy back any ordinary shares in the
near term. Thereafter any buy back of ordinary shares will be subject to the Companies Act 2006 (as amended), the Listing Rules and within
guidelines established by the Board from time to time (which will take into account the income and cash flow requirements of the Company).
Resolution 12 will be proposed as a special resolution and seeks to provide the Directors with the authority to purchase up to 92,973,578
ordinary shares or, if less, the number representing approximately 14.99% of the Company’s ordinary shares in issue at the date of the passing
of resolution 12. Any shares purchased by the Company may be cancelled or held in treasury. The Company does not currently hold any
shares in treasury.
For each ordinary share, the minimum price (excluding expenses) that may be paid on the exercise of this authority will not be less than the
nominal value of each ordinary share at the date of purchase. Under the Listing Rules, the maximum price that may be paid on the exercise
of this authority must not exceed the higher of: (i) 105% of the average of the middle market quotations (as derived from the Daily Official List
of the London Stock Exchange) for the shares 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 trading venue on which the purchase is carried out.
This authority will expire at the conclusion of the next AGM of the Company after the passing of this resolution unless it is previously renewed,
varied or revoked.
Notice for General Meetings
Resolution 13 is being proposed to reflect the provisions of the Companies Act 2006 relating to meetings and the minimum notice period
for listed company General Meetings being increased to 21 clear days, but with an ability for companies to reduce this period to 14 clear days
(other than for AGMs), provided that the Company offers facilities for shareholders to vote by electronic means and that there is an annual
resolution of shareholders approving the reduction in the minimum period for notice of General Meetings (other than for AGMs) from 21 clear
days to 14 clear days. The Board is therefore proposing resolution 13 as a special resolution to ensure that the minimum required period for
notice of General Meetings of the Company (other than for AGMs) is 14 clear days.
The approval will be effective until the earlier of 15 months from the passing of the resolution or the conclusion of the next AGM of the
Company at which it is intended that a similar resolution will be proposed. The Board intends that this flexibility of a shorter notice period to
be available to the Company will be used only for non-routine business and only where needed in the interests of shareholders as a whole.
Recommendation
The Directors consider each resolution being proposed at the Annual General Meeting to be in the best interests of the Company and its
shareholders as a whole and they unanimously recommend that all shareholders vote in favour of them, as they intend to do in respect
of their own beneficial holdings of shares which amount in aggregate to 150,455 ordinary shares representing approximately 0.02 per cent
of the current issued share capital of the Company.
Directors’ Deeds of Indemnity
During the year ended 30 June 2021, the Company entered into updated deeds of indemnity in favour of each of the Directors, with a deed of
indemnity in favour of Mr Niblett also being entered into on his date of appointment. The deeds give each Director the benefit of an indemnity
to the extent permitted by the Companies Act 2006 against liabilities incurred by each of them in the execution of their duties and the exercise
of their powers. A copy of each deed of indemnity is available for inspection at the Company’s registered office during normal business hours
and will be available for inspection at the Annual General Meeting. The Company also maintains directors’ and officers’ liability insurance.
34
Target Healthcare REIT plc
Conflicts of Interest
Under the Companies Act 2006 a Director must avoid a situation where he or she has, or could have, a direct or indirect interest that conflicts,
or possibly may conflict, with the Company’s interests. The requirement is very broad and could apply, for example, if a Director becomes a
director of another company or a trustee of another organisation. The Companies Act 2006 allows directors of public companies to authorise
conflicts and potential conflicts, where appropriate, where the Articles of Association contain a provision to this effect. The Company’s Articles
of Association give the Directors authority to approve such situations. The Company maintains an up-to-date register of Directors’ conflicts of
interest which have been disclosed to, and approved by, the other Directors. This register is considered at each scheduled Board meeting. The
Directors are required to disclose to the Company Secretary any changes to conflicts or any potential new conflicts.
Depositary
IQ EQ Depositary (UK) Limited (the ‘Depositary’) acts as the Group’s depositary in accordance with the AIFM Directive. The Depositary’s
responsibilities, which are set out in an Investor Disclosure Document available on the Company’s website, include cash monitoring, record
keeping and verification of non-custodial assets and general oversight of the Group’s portfolio. The Depositary receives for its services a fee
based on the value and activity of the property portfolio, payable quarterly. For the year ended 30 June 2021, the fees paid totalled £135,000.
Other Companies Act 2006 Disclosures
The rules for appointment and replacement of Directors are contained in the Articles of Association of the Company. In respect of retiral by
rotation, the Articles of Association provide that each Director is required to retire at the third annual general meeting after the annual general
meeting at which last elected. As mentioned on page 31, the Board has agreed that all Directors will retire annually.
Any amendment of the Company’s Articles of Association and powers to issue and buy back shares require shareholder authority.
There are no agreements between the Company and the Directors providing for compensation for loss of office that occurs because of a
takeover bid.
Future Developments of the Company
The future success of the Company in pursuit of its investment objective is dependent primarily on the performance of its investments and
the outlook for the Company is set out in the Chairman’s Statement on pages 4 and 5 and the Investment Manager’s Report on pages 12 to 13.
Environmental, Social and Governance Principles
The Company seeks to conduct its affairs responsibly and environmental factors are, where appropriate, taken into consideration in relation
to investment decisions taken on behalf of the Group. Further details are contained on pages 8 and 9 and in the Corporate Governance
Statement on page 41.
Greenhouse Gas Emissions/Streamlined Energy and Carbon Reporting
All of the Company’s activities are outsourced to third parties. As such it does not have any physical assets, property, employees or operations
of its own and does not generate any greenhouse gas or other emissions. As the Group has entered into operational leases on its property
portfolio, the Company does not have operational control over these properties and therefore assesses that the tenant should report on any
carbon emissions associated with the operation of the care homes. Following this assessment, the Group is categorised as a lower energy
user under the HM Government Environmental Reporting Guidelines March 2019 (‘the Guidelines’) and is not required to make the detailed
disclosures of energy and carbon information set out within the Guidelines.
Taskforce on Climate-related Financial Disclosures (‘TCFD’)
The Company acknowledges the recommendations of the Financial Stability Board TCFD to improve and increase reporting of climate-related
financial information and will work towards mitigating, where appropriate, the physical climate risks and opportunities arising in the property
portfolio.
Modern Slavery Act 2015
As an investment company with no employees or customers and which does not provide goods or services in the normal course of business,
the Company considers that it does not fall within the scope of the Modern Slavery Act 2015 and it is not, therefore, obliged to make a human
trafficking statement. The Company’s own supply chain which consists predominantly of professional advisers and service providers in the
financial services industry, is considered to be low risk in relation to this matter.
Criminal Finances Act 2017
The Company has a zero tolerance policy to tax evasion and the facilitation of tax evasion. The Company is fully committed to complying
with all legislation and appropriate guidelines designed to prevent tax evasion and the facilitation of tax evasion in the jurisdictions in which
the Company, its service providers and business partners operate.
The Company is subject to the Criminal Finances Act 2017 and has adopted a policy, endorsed by the Board, designed to prevent tax evasion
and the facilitation of tax evasion. Our policy establishes a culture across the Company and in relation to our service providers and other
counterparties, in which tax evasion and the facilitation of tax evasion is unacceptable. The policy is based on a detailed risk assessment
undertaken by the Board annually.
Annual Report and Financial Statements 2021
35
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Directors’ Report continued
UK Bribery Act 2010
In order to ensure compliance with the UK Bribery Act 2010, the Directors confirm that the Company follows a zero tolerance approach
towards bribery, insofar as it applies to any Directors of the Company or employee of the Investment Manager or any other organisation
with which the Company conducts business, and a commitment to carry out business openly, honestly and fairly.
The Board also ensures that adequate procedures are in place and followed in respect of the appointment of third-party service providers
and the acceptance of gifts and/or hospitality.
Financial Instruments
The Company’s financial instruments comprise its cash balances, bank debt and debtors and creditors that arise directly from its operations
such as deposits held on behalf of tenants and accrued rental income. The financial risk management objectives and policies arising from
its financial instruments and the exposure of the Company to risk are disclosed in note 17 to the Consolidated Financial Statements.
Annual General Meeting
The Company is required by law to hold an Annual General Meeting and it will be held at the offices of Dickson Minto W.S., 16 Charlotte
Square, Edinburgh EH2 4DF on 14 December 2021 at 4.00 p.m. The Notice of Annual General Meeting is set out on pages 87 to 89.
We would strongly encourage all shareholders to make use of the proxy form provided in order to lodge your votes. Shareholders
are also encouraged to raise any questions or comments they may have in advance of the AGM through the Company Secretary
(info@targetfundmanagers.com). These will be relayed to the Board and either the Company Secretary or the Board will respond in
due course either directly or by making available a summary of responses to any frequently asked questions on the Company’s website.
On behalf of the Board
Malcolm Naish
Chairman
19 October 2021
36
Target Healthcare REIT plc
Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Strategic Report, the Directors’ Report, the Directors’ Remuneration Report and the Financial
Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to
prepare the Consolidated Financial Statements in accordance with International Financial Reporting Standards (‘IFRSs’) in conformity with the
Companies Act 2006 and have elected to prepare the parent company financial statements in accordance with United Kingdom Generally
Accepted Accounting Practice (UK Accounting Standards and applicable law), including Financial Reporting Standard 101 ‘Reduced Disclosure
Framework’. Under the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules, group financial statements are required to
be prepared in accordance with IFRSs adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of
the state of affairs and profit or loss of the Company and Group for that period. In preparing these Financial Statements, the Directors are
required to:
– select suitable accounting policies and then apply them consistently;
– make judgements and accounting estimates that are reasonable and prudent;
– 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 adequate 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 the Financial Statements and
the Directors’ Remuneration Report comply with the Companies Act 2006 and, in relation to the Consolidated Financial Statements, Article 4
of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s
website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation
in other jurisdictions.
Directors’ responsibility statement in respect of the Annual Report and Financial Statements
The Directors are responsible for preparing the Annual Report in accordance with applicable law and regulations. The Directors consider
the Annual Report and the Financial Statements, taken as a whole, provide the information necessary to assess the Company’s position,
performance, business model and strategy and are fair, balanced and understandable.
Directors’ responsibility statement under the disclosure guidance and transparency rules
To the best of our knowledge:
– the Consolidated Financial Statements, prepared in accordance with IFRSs adopted pursuant to Regulation (EC) No 1606/2002 as it applies
in the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole; and
– the Annual Report, including the Strategic Report and the Directors’ Report, includes a fair review of the development and performance
of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they face.
Disclosure of information to the auditor
The Directors confirm that:
– so far as each Director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and
– the Directors have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit
information and to establish that the Company’s auditor is aware of that information.
On behalf of the Board
Malcolm Naish
Chairman
19 October 2021
Annual Report and Financial Statements 2021
37
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Corporate Governance Statement
Welcome to the corporate governance section
of the Annual Report. The aim of this section
is to set out the framework under which the
independent Board, and its various sub-
committees, ensure that both the Company
and the service providers acting on its behalf
make appropriate decisions and undertake
actions in line with the interests of the
Company’s stakeholders.
Malcolm Naish
Chairman
Introduction
The Board of Target Healthcare REIT plc has considered the Principles and Provisions of the AIC Code of Corporate Governance (‘AIC Code’).
The AIC Code addresses the Principles and Provisions set out in the UK Corporate Governance Code (the ‘UK Code’), as well as setting out
additional Provisions on issues that are of specific relevance to the Company.
The Board considers that reporting against the Principles and Provisions of the AIC Code, which has been endorsed by the Financial Reporting
Council, provides more relevant information to shareholders. The Company has complied with the Principles and Provisions of the AIC Code.
The AIC Code is available on the AIC website (www.theaic.co.uk). It includes an explanation of how the AIC Code adapts the Principles and
Provisions set out in the UK Code to make them relevant for investment companies. The UK Code is available on the website of the Financial
Reporting Council: www.frc.org.uk
The Board
The Board is responsible for the effective stewardship of the Group’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, through
the Investment Committee, 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 Healthcare Property Consultants Limited.
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 Group’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 below sets out the number of scheduled Board and Committee meetings held during the year and the number of meetings
attended by each Director. This includes a two-day strategy meeting held virtually by the Board during October 2020 in order to consider
strategic issues. In addition to these scheduled meetings, there were a further 25 Board and Board Committee meetings held during the year.
These additional meetings included regular updates with the Investment Manager and other appropriate advisers on significant matters arising
from the COVID-19 pandemic to ensure that appropriate actions were taken on a timely basis.
Board
Audit
Committee
Investment
Committee
Management
Engagement Committee
Nomination
Committee
Remuneration
Committee
Held
Attended
Held
Attended
Held
Attended
Held
Attended
Held
Attended
Held
Attended
Malcolm Naish
June Andrews OBE
Gordon Coull
Tom Hutchison
Alison Fyfe
5
5
5
5
5
5
5
5
5
5
3
3
3
3
3
3
3
3
3
3
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
3
3
3
3
3
3
3
3
3
3
1
1
1
1
1
1
1
1
1
1
Each of the Directors has signed a letter of appointment with the Group which includes twelve months’ notice of termination by either party.
These are available for inspection at the Company’s registered office during normal business hours and are also made available at annual
general meetings.
Individual Directors may, at the expense of the Group, seek independent professional advice on any matter that concerns them in the
furtherance of their duties. The Group 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.
38
Target Healthcare REIT plc
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 (‘IMA’) and the fees payable to the Investment
Manager, together with the standard of the other services provided.
During the year, through the Management Engagement Committee, the Board considered the appropriateness of the terms of the Investment
Manager’s appointment and concluded that:
– the level of fees payable to the Investment Manager, which were considered both in isolation and against a schedule of the fees payable
across the Company’s peer group prepared by the Company’s brokers, remained appropriate. This conclusion took into account the tiered
management fee structure which, following the equity issuance in March 2021, had reduced the management fee rate applicable to net
assets in excess of £500 million. The assessment also took into consideration the previous amendment, with effect from 1 January 2018,
which, given the continued outperformance of the Group’s portfolio against the MSCI UK Annual Healthcare Property Index, has resulted in
an overall reduction in the total management fees which would otherwise have been paid in each year since the amendment took effect;
– the specialist nature of the properties in which the Company invests requires a detailed knowledge of the sector, and that the nature of the
asset class means that investment decisions tend to be long-term in nature, and that therefore the longer-term notice period which took
effect in May 2020 remains appropriate; balancing the interests of the Company in supporting the performance of its incumbent
Investment Manager against retaining the Company’s ultimate sanction of being able to replace the Investment Manager; and
– the standard of other services provided remained appropriate.
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 Association require all Directors to retire by
rotation at least every three years. However, in accordance with the recommendations of the AIC 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. The current Board composition consists of four male and two female Directors. None of the current Directors come from an ethnic
minority background. 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. However,
as set out on page 31, the current Board succession plan does not envisage that any current Director will serve for significantly more than the
nine-year period that the AIC Code considers could impair, or could appear to impair, a non-executive Directors’ independence. This may,
however, be adjusted for reasons of flexibility and continuity should this be recommended by the Nomination Committee and concluded by
the Board to be in the best interests of the Company.
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.
Removal of Directors
The Company may by special resolution remove any Director before the expiration of his or her period of office.
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 Group 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 Group that are likely to affect that judgement.
The basis on which the Group aims to generate value over the longer term is set out in its objective and investment policy as contained on
pages 30 and 31. A management agreement between the Group 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 as detailed below. 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 pages 42 to 44.
Remuneration Committee
During the year, the Board established a Remuneration Committee, the role and responsibilities of which are set out in the report on page 47.
Annual Report and Financial Statements 2021
39
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Corporate Governance Statement continued
Management Engagement Committee
The Board has established a Management Engagement Committee which comprises all the Directors and which 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. Further details of the work
undertaken by the Management Engagement Committee in relation to the terms of appointment of the Investment Manager is set out on page 39.
Investment Committee
The Board has established an Investment Committee which comprises all the Directors and which is chaired by Mr Naish. The Committee
reviews each investment paper prepared by the Investment Manager and is responsible for authorising all purchases and sales, and significant
capital expenditure or asset management activities, within the Company’s portfolio. The Investment Committee considered each investment
paper as and when circulated by the Investment Manager, providing independent challenge where appropriate, and met quarterly to formally
ratify the Committee’s decision to approve or decline each of the investment recommendations proposed.
Nomination Committee
The Board has established a Nomination Committee which comprises all the Directors. Ms Fyfe was appointed as chair of the Nomination
Committee with effect from 2 December 2020 and chaired all meetings held throughout the year. The Committee’s terms of reference do not
permit the Committee to be chaired by the Chair of the Board when considering the appointment of their successor. 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.
This is considered appropriate given the Board consists solely of independent, non-executive Directors and ensures that all Directors are kept
fully informed of any issues that arise.
The Nomination Committee is responsible for:
– reviewing and nominating candidates for the approval of the Board to fill vacancies on the Board of Directors and to lead the process for
appointments, including the selection and appointment of any external recruitment consultant;
– considering and reviewing the composition and balance of the Board;
– ensuring that plans are in place for orderly succession to the Board and overseeing the development of a diverse pipeline for succession; and
– reviewing the re-appointment of Directors, as they fall due for re-election, under the terms of their appointment and the AIC Code, and
making recommendations to the Board as considered appropriate.
All of the Nomination Committee’s responsibilities have been carried out over the period of review.
The Nomination Committee met on three occasions throughout the year to ensure that the plans in place for an orderly succession to the Board,
as set out on page 31, remained appropriate and to undertake the recruitment process for the Director appointed shortly after the year end.
Similar to the process in place in the prior year regarding the appointment of Ms Fyfe, the Nomination Committee worked with an external
recruitment consultant to determine the appropriate skills and experience required of the next appointee(s) and to agree the appropriate method
of recruitment, selection and appointment. After considering applications, reviewing a long-list of candidates and conducting interviews with
the short-listed candidates, the Committee recommended that Mr Niblett be appointed as a Director with effect from 25 August 2021.
Assessment of the Board and Committees
During the year, the performance of the Board, Committees and individual Directors was evaluated through an assessment process led by
an external facilitator, Fletcher Jones Limited. This process was tailored to the specific environment, operating style and strategic goals and
challenges faced by the Company and involved each Director completing a confidential survey, followed by private one-to-one conversations
between the external facilitator and each director and with representatives of the Company’s Investment Manager, broker and legal adviser.
The external facilitator was paid a fee in relation to this engagement and, other than also being engaged to undertake an independent review
of the Directors’ remuneration, as described on page 48 and in relation to which Fletcher Jones received a separate fee, has no other
connection or conflict of interest with the Company.
A formal report of their findings was provided by the external facilitator to, and considered by, the Nomination Committee. This presented an
objective view on the current working of the Board, as well as the strengths of the current Board together with any potential gaps and areas
that could further strengthen the working of the Board. The report also considered the challenges, opportunities and strategic direction of
travel anticipated over the near to medium-term. The main findings of the external evaluation were:
– that the Board was operating well, with skill and focus on all the areas of importance; including proactive consideration of the Company’s
performance, risk profile and future growth;
– that the Directors formed a harmonious and supportive Board with a good relationship with a well-performing and values-driven
Investment Manager;
– that the Board had identified the main matters for consideration over the following twelve months, including continued consideration of
the impact of COVID-19, the continued growth of the Company whilst maintaining the quality and differentiation of its portfolio, and
engaging and reporting further on ESG matters; and
– that the Board should continue to consider succession planning, in relation to both the Board and the Investment Manager, to ensure that
the current effective running of the Company was maintained.
The conclusion from the appraisal process conducted in relation to the year ended 30 June 2021 was that the Board and each committee was
operating effectively, with an appropriate and sufficient balance of experience and skills. The Board anticipates having an externally facilitated
Board evaluation conducted at least every three years.
40
Target Healthcare REIT plc
Relations with shareholders
The Group 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 the Group’s business and address shareholder queries. The Chairman has held a
number of discussions, and entered into correspondence, with shareholders over the course of the year on specific areas of interest, such as
the resolutions proposed at the AGM, the level and structure of the Group’s management fees and the Group’s responsible investment policies.
It is expected that such meetings will continue to be made available although, depending on any prevailing restrictions on travel and/or
guidance on social distancing, this may be through the use of video conferencing facilities.
The Notice regarding the Annual General Meeting is included on pages 87 to 89. It is currently intended that the AGM will be held physically at
the offices of Dickson Minto, 16 Charlotte Square, Edinburgh EH2 4DF. However, as set out on page 36, shareholders are encouraged to lodge
their votes either by use of the proxy form provided, or by electronic means, and to submit any questions they may have for the Directors or
Investment Manager in advance through the Company Secretary (info@targetfundmanagers.com). 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
Responsible Investment and Environmental, Social and Governance (‘ESG’) considerations are core values of the Group and its Investment
Manager. These are considered in more detail on pages 8 and 9.
– ESG considerations lie at the heart of the Group’s approach because of our belief that a strong care ethos is essential for the long-term
health of our investments. The Investment Manager commits extensive resources to incorporating ESG (and responsible investing principles)
throughout their investment and decision-making processes, both at the time of the acquisition of any asset and on an ongoing basis.
– Before acquiring any home, the Investment Manager reviews on a granular level, inter alia: the position of the home in the community and
how the home engages with its community, the building lay-out and facilities, the natural environment of the home, the management team
and general governance shown by the tenant as well as any relevant ratings by regulatory bodies such as the Care Quality Commission.
– Once the Group has acquired a care home, the Investment Manager undertakes regular reviews of the environmental, social, governance
and ethical policies that the home has in place and (to the extent possible) their adherence to these policies in the delivery of their services.
– The Investment Manager’s role as an engaged landlord includes careful monitoring of the home and ongoing dialogue with management.
In usual circumstances, the Investment Manager will visit every home at least every six months, occasionally visit the properties
unannounced to gauge the culture and engaging with tenants who wish to improve their homes, potentially providing support and funding
for this. During the COVID-19 pandemic, the Investment Manager has continued to stay in touch with its tenants in order to provide
support and to share market practice and published guidance, where appropriate.
– The Group’s vision of care includes promoting the conservation, protection and improvement of the physical and natural environments
surrounding care homes not least because this makes the care home more attractive for both tenants and residents.
Stewardship Code
Following the Financial Reporting Council’s publication of The UK Stewardship Code 2020 (the ‘Stewardship Code’), which extended the
application of the previous code to include investment properties, the Investment Manager completed an application to become a signatory
to the Stewardship Code. The Investment Manager was successful in its application and was included in the first list of signatories to the
Stewardship Code published by the Financial Reporting Council on 6 September 2021. The Investment Manager’s Stewardship Code
Statement of Compliance for the year ended 31 December 2020 is available on its website at www.targetfundmanagers.com.
Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading
to sustainable benefits for the economy, the environment and society. The Stewardship Code sets high stewardship standards for asset
owners and asset managers, and for service providers that support them.
On behalf of the Board
Malcolm Naish
Chairman
19 October 2021
Annual Report and Financial Statements 2021
41
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Report of the Audit Committee
Welcome to the Report of the Audit
Committee. During a year of continuing
uncertainty, this report sets out the role,
responsibilities and actions taken by the
Audit Committee to ensure that the
suitable controls continue to operate
and that appropriate financial information
continues to be issued on a timely basis
to the Company’s stakeholders.
Gordon Coull
Chair of the Audit Committee
Composition of the Audit Committee
An Audit Committee chaired by Mr Coull has been established with written terms of reference which are reviewed at each meeting and which
are available on request. The Audit Committee currently comprises all Directors. The Board will consider each Director’s membership of the
Audit Committee on a case-by-case basis but, in general, believes that, given the Group’s size, a committee which includes all Directors is
appropriate and will enable all Directors to be kept fully informed of any issues that arise.
The Board consider that the Chairman’s experience of the property sector is invaluable to the Audit Committee, particularly in regard to
assessing and providing challenge to the external valuation of the Group’s property portfolio, and therefore, in line with the AIC Code, the
Board believes it appropriate that the Chairman remains a member of the Committee.
At least one member of the Audit Committee has recent and relevant financial experience and the Committee as a whole has competence
relevant to the sectors in which the Group operates; which are considered to be healthcare, property and investment.
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
Monitoring the integrity of the half-year
and annual financial statements, and
any formal announcements relative to
the Group’s financial performance,
including the appropriateness of the
accounting policies applied and any
significant financial reporting
judgements and key assumptions.
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.
The Committee has met three times during the year to:
– review the contents of the half-yearly report, and to consider the audit plan and the proposed
audit fee;
– consider, in advance of the Company’s year end, any significant changes to accounting
standards or other disclosure requirements and any significant financial reporting judgements
and key assumptions expected to apply at the Group’s year end; and
– review the contents of the Annual Report.
The Investment Manager and Company Secretary attended each of these meetings, with the Auditor
also attending the meetings at which the audit plan and the contents of the half-yearly and annual
reports were reviewed. The significant matters considered by the Group are listed on pages 45 and
46. In addition, during the year, the Committee kept under review the Investment Manager’s plan in
relation to the implementation of a new financial accounting and reporting system, the statutory
financial reporting of each of the Group’s subsidiaries for the period ended 30 June 2020 and the
internal financing structure of the Group.
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 was
based, to ensure that the work undertaken, the conclusions reached and the disclosures included
within the Annual Report were appropriate.
42
Target Healthcare REIT plc
Responsibilities of the Audit Committee
How they have been discharged
Evaluation of the effectiveness of the
internal controls and risk management
systems and procedures.
The Investment Manager maintains a risk matrix which summarises the Group’s key risks. The risk
matrix is considered by the Directors at least semi-annually, with key principal and emerging risks
also discussed at the Group’s annual two-day strategy meeting.
Consideration of dividend calculations
both in relation to PID/non-PID
payments made by the Company and
other dividends paid internally within
the Group.
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 position,
performance, business model
and strategy.
Evaluation of reports received from
the Auditor with respect to the annual
financial statements and assessment
of quality of the audit.
The Committee appoints a reporting accountant to review and report on the operation of certain
internal controls including those over significant IT functions in place within the Investment
Manager. This review is completed annually, although the scope of work is amended each year,
by direct discussion between the Committee and the reporting accountant, to focus on areas that
the Committee believes to be of highest risk or where there has been significant change over the
year under review. In the current year, this independent review focused on the continued operation
of key controls over rental collection, property valuations, NAV and financial statement production,
analysis of tenant management information, the IT environment and risk management. In addition
the review included consideration of the Investment Manager’s implementation plan for a new and
improved accounting system.
From a review of the matrices, the outcome of the procedures undertaken by the reporting
accountant and the regular management information received by the Board and Committees,
combined with discussion with the Investment Manager and Company Secretary, the Committee
has satisfied itself on the effectiveness of the risk and control procedures.
The Committee has reviewed the calculation of the split of distributions between PID and non-PID,
including consideration of the suitability of the allocation of the costs of the Group between its
property rental business and its residual business.
The Committee has reviewed the methodology followed by the Investment Manager, and directors
of the subsidiaries, in determining and recommending the level of other dividends paid internally
within the Group.
The Committee has reviewed the content and presentation of the Annual Report and ensured that
it achieves the three criteria opposite. As part of this review, the Committee considered the nine
characteristics of good corporate reporting set out in the FRC’s Annual Review of Corporate
Reporting.
The Auditor’s planning report, timetable and fee proposal were discussed with the Auditor in advance
of work commencing, together with the areas of audit focus, the level of materiality and the audit
work proposed to be undertaken. The Committee paid particular attention to any changes in
accounting standards or in the nature of activities undertaken by the Group and ensured that the audit
plan appropriately addressed these areas. The Committee specifically challenged the Auditors, at both
the planning and reporting stage, in relation to the audit work undertaken in relation to any particular
elements of judgement or estimation; including the property valuations and the credit loss allowance.
The Committee specifically considered the external valuation of the Group’s property portfolio,
with the external valuers attending the meeting at which the annual results were discussed in order
to present directly to the Committee a summary of their valuation process and any significant
matters they wished to highlight either in relation to the valuation methodology generally or to
specific individual properties or tenants.
At the conclusion of the audit, the Committee discussed the audit results report with the Auditor,
Company Secretary and Investment Manager. This review considered the quality of the audit
through ensuring that the audit risks identified and the audit work undertaken did, in the opinion
of the Audit Committee, capture and appropriately consider those matters which gave rise to the
risk of material misstatement to the financial statements and disclosures.
Further detail on the assessment of the quality of the audit is included in the section entitled
‘The Auditor’ on pages 44 and 45.
Monitoring developments in
accounting and reporting requirements
that impact on the Group’s compliance
with relevant statutory and listing
requirements.
The Committee ensures, through its Legal Adviser, Investment Manager, Company Secretary
and Auditor, that any developments impacting on the Company’s responsibilities are tabled for
discussion at Committee or Board meetings. The Committee ensured that the Company was fully
compliant with the AIC Code. The Committee also ensured, through summaries provided at regular
update meetings held by the Board during the COVID-19 pandemic, that the Group continued to
be aware of, and remain compliant with, rapidly changing regulatory guidance.
Annual Report and Financial Statements 2021
43
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Report of the Audit Committee continued
Responsibilities of the Audit Committee
How they have been discharged
Management of the relationship with
the external Auditor, including their
appointment and the evaluation of
scope, effectiveness, independence
and objectivity of their audit.
The Auditor attended the meetings of the Committee at which the Company’s audit plan, half-yearly
report and year end accounts were reviewed and also met separately with the chairman of the
Committee on two occasions, firstly, to discuss the findings of their interim review and the audit
plan for the year ahead and, secondly, to consider 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,
as set out in more detail in the section entitled ‘The Auditor’ below and on the following page.
Risk management and internal controls
The principal and emerging risks faced by the Group together with the procedures employed to manage them are described in the Strategic
Report on pages 22 and 23.
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 to provide reasonable assurance on the effectiveness of internal financial control in the following
areas:
– Income flows, including rental income, the assessment of the financial position of tenants and the appropriateness of credit loss
impairments;
– Expenditure, including operating and finance costs;
– Raising finance, including debt facilities and equity fund-raising;
– Capital expenditure, including pre-acquisition diligence and authorisation procedures;
– Dividend payments, including the calculation of Property Income Distributions;
– Monitoring of covenants on loan facilities;
– 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 a prospectus, a circular to Shareholders or the annual report.
As the Group has evolved, the Investment Manager has developed a system of internal controls covering the processes listed above. As referred
to on page 43 in relation to the year ended 30 June 2021, the Group engaged a reporting accountant to undertake an overview of the control
environment of the Investment Manager. This review focused on ensuring that any recommendations made following a similar review in the prior
year had been implemented appropriately and checking the controls over any areas of significant change. No significant 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, including information technology systems.
In addition, the Board keeps under its own direct control, through the Investment Committee, all property transactions including any
significant capital expenditure. 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 Group’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 reviewing EY’s independence, the Committee noted that EY did not provide any non-audit services to the
Group other than the review of the Group’s Interim Report.
44
Target Healthcare REIT plc
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, along with their robustness and perceptiveness in their identification, consideration and reporting of the key accounting and audit
judgements. 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, including the reasons for any variation from the original audit plan, together with the contribution
which EY made to the discussion of any matters raised in these reports or by Committee members. The Committee also reviewed the FRC’s
Audit Quality Inspection Report on Ernst & Young LLP published in July 2021 and took into account any relevant observations made by the
Investment Manager and Company Secretary. The Committee is satisfied that EY provides an effective independent challenge in carrying out
its responsibilities.
EY has been the auditor to the Group since its launch in 2013. Following professional guidelines, the audit principal rotates after five years.
The current audit principal is Caroline Mercer and the audit for the year ended 30 June 2021 constitutes the fourth year of her term. Having
considered the effectiveness of the audit, the Audit Committee has recommended the continuing appointment of EY as the Group’s auditor to
the Board. The performance of the Auditor will continue to be reviewed annually taking into account all relevant guidance and best practice.
After careful consideration, the Audit Committee will conduct a tender of audit services to the Group during the course of the year with the
successful party being proposed for appointment at the 2022 AGM, in relation to the audit of the Group for the year ending 30 June 2023.
This will correspond with both the fifth year of the term of the current audit principal and the tenth year of EY’s term. The Audit Committee
currently intends that EY will be invited to participate in the tender process.
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 service shown in the table below does not
constitute such a threat.
Other than the review of the interim financial information, the auditors were not engaged to undertake any non-audit services either during
the year or over the prior three-year rolling period. Different accountancy firms were engaged to provide tax advice and compliance, to act
as Reporting Accountant in relation to the shares issued under the prospectus and to undertake the review of the internal controls within the
Investment Manager. The Audit Committee will also seek to ensure that the provision of non-audit services will not endanger the
independence of any party that the Company may wish to invite to participate in the next audit tender.
Service provided
Statutory audit of the Company for the year ended 30 June 2021
Statutory audit of the Company’s subsidiaries for the year ended 30 June 2021
Review of interim financial information for the six months ended 31 December 2020
Total
The fees quoted above are inclusive of irrecoverable VAT.
Fee (£’000)
104
194
15
313
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 88.7 per
cent of its total assets as at 30 June 2021. Although
valued by an independent firm of valuers, Colliers
International Healthcare 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 is set out in notes 9 and 10 to
the Consolidated 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
the Directors had the opportunity to discuss the detail of each of the quarterly
valuations with the Investment Manager.
The Committee discussed the valuation as at 30 June 2021 directly 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.
The Committee also discussed with the Auditor the work performed to confirm
the valuation and ownership of the properties in the portfolio and noted the
report of the Depositary, particularly the sections regarding the Depositary’s
responsibilities and work in relation to asset verification. The Committee
considered the significant estimates and judgements inherent in the valuation
process and considered how the auditors had challenged these by discussing
the outcome of the review of the property valuations directly with the Auditor’s
valuation specialists; focussing particularly on any areas of difference between
the judgement of the external valuers and the auditors.
Annual Report and Financial Statements 2021
45
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Report of the Audit Committee continued
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.
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.
Impact of COVID-19
Given the potentially significant impact of COVID-19
on the economic conditions in which the Group was
operating, the Audit Committee kept under review
the requirement to make any additional market
announcements and have placed a particular focus on
the appropriateness of continuing to adopt the going
concern basis in preparing the financial statements for
the year ended 30 June 2021.
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,
and considered the basis of calculation of the Group’s estimated credit losses.
The Committee particularly considered the accounting treatment of a payment
made by an outgoing tenant as part of an asset management initiative.
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.
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.
As described on page 43, an external Reporting Accountant was appointed
to complete a review of certain aspects of the control environment of the
Investment Manager, based on a scope of work agreed directly between the
Reporting Accountant and the Audit Committee, and they reported their findings
directly to the Audit Committee. There were no material control deficiencies or
weaknesses identified through this review.
The Directors continued to meet regularly throughout the year to consider the
economic and market conditions within which the Company was operating and,
under the guidance of the Chairman of the Audit Committee, to consider the
necessity, content and timing of announcement of financial information to the
market, both to meet the Company’s regulatory obligations and to keep
investors informed.
The Audit Committee also considered the assessment of the Company’s going
concern position, as set out in more detail in the accounting policies on page 61
and the viability statement on pages 32 and 33. The Audit Committee considered
the FCA’s published guidance, along with emerging market practice, in
conducting this assessment.
The Audit Committee noted that there were no unadjusted errors reported by the Auditors or any other indication of systemic weaknesses in
the Group’s internal controls or financial reporting processes and that no adjustments were required to the financial statements as presented.
Conclusion 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 2021, taken as a whole, is fair,
balanced and understandable and provides the information necessary for shareholders to assess the Group’s position, performance, business
model and strategy.
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.
Gordon Coull
Chairman of the Audit Committee
19 October 2021
46
Target Healthcare REIT plc
Directors’ Remuneration Report
Welcome to the Directors’ Remuneration Report.
The aim of this report is to set out the policy
used by the Company in setting the Directors’
remuneration, as well as declaring the actual fees
paid during the year and expectations for the
following twelve months. In the current year, the
Committee engaged an external remuneration
consultant to ensure that the fees paid to the non-
executive directors are at an appropriate level.
Alison Fyfe
Chair of the Remuneration Committee
Composition and Role of the Remuneration Committee
During the year, a Remuneration Committee chaired by Ms Fyfe was established with written terms of reference. These are reviewed at each
meeting and are available on request. The Remuneration Committee is currently comprised of all Directors which is considered appropriate
given the Group’s size and as the Board comprises only independent non-executive Directors. The Company has no executive Directors or
employees. Prior to her appointment as chair of the Committee, the Board concluded that Ms Fyfe had relevant experience and
understanding of the Company.
The role of the Remuneration Committee is to design remuneration policies and practices to support the Group’s strategy and to promote
its long-term sustainable success. The objective of such policy shall be to attract, retain and motivate non-executive Directors of the quality
required to govern the Company successfully without paying more than is necessary, having regard to views of shareholders and other
stakeholders. The policy shall be reviewed by the Committee at least annually to ensure its ongoing appropriateness and relevance.
The Committee shall recommend a level of remuneration for each of the Directors to the Board, within the limits set in the Articles of
Association or as otherwise approved by the Company’s shareholders.
Full details of the Group’s policy with regards to Directors’ fees, the fees paid to each Director during the year ended 30 June 2021 and the
intended fees to be paid in relation to the forthcoming year are shown on the following page.
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. The policy also provides for the Company’s
reimbursement of all reasonable travel and associated expenses incurred by the Directors in attending Board and Committee meetings.
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 2022.
The fees for the Directors are determined within the limit set out in the Company’s Articles of Association. The present limit is an aggregate of
£250,000 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 setting out
the terms and conditions of his or her appointment. The Directors’ letters of appointment are available on request at the Company’s registered
office during business hours and will be available for fifteen minutes prior to and during the forthcoming Annual General Meeting.
The terms of Directors’ appointments provide that Directors should retire and be subject to election at the first Annual General Meeting after
his or her appointment and, in accordance with the recommendations of the AIC Code, the Board has agreed that all Directors will retire
annually and, if they wish, to offer themselves for re-election. There is no notice period and no provision for compensation upon termination
of appointment.
Voting at Annual General Meeting on the Directors’ Remuneration Policy
The Company has not received any direct communications from its shareholders in respect of the levels of Directors’ remuneration.
Shareholders last approved the Directors’ Remuneration Policy at the Company’s AGM held on 28 November 2019. 100 per cent of the votes
cast were in favour of the resolution and votes withheld represented less than 0.002 per cent of the shares in issue. It is currently intended that
the above policy will continue for a three-year period and will therefore next be considered at the AGM to be held in 2022.
Annual Report and Financial Statements 2021
47
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Directors’ Remuneration Report continued
Directors’ Fees
The Board considers the level of Directors’ fees at least annually. At the end of the current year, an external consultant was appointed to
provide advice on the level of Directors’ Remuneration in order to ensure that the level of remuneration remains in line with the market level
necessary to attract, retain and motivate non-executive Directors of the quality required to govern the Company successfully. Both the
remuneration and nomination committees consider this to be of particular importance at the current time given the ongoing implementation
of the Directors’ succession plan. This review was undertaken by Fletcher Jones Limited, a firm which was also appointed to undertake the
external appraisal of the Board as reported in more detail on page 40. It is expected that external advice in relation to the level of Directors’
remuneration will continue to be sought every three years.
As reported in the prior year, following a review by the Remuneration Committee of the level of fees paid by the Group’s peer group and
consultation with various of the Group’s advisers in relation to their experiences of market practice at that time, the Board concluded that the
level of Directors’ fees paid by the Company was below that paid by other similar companies. However, mindful of the circumstances being
faced by the healthcare sector and uncertainty over the general economic environment, it was considered appropriate to maintain fees at
the existing level for the year ended 30 June 2021.
The independent external review recommended that the appropriate market level of fees would be £57,700 per annum for the Chairman,
£44,600 per annum for the Audit Committee Chair and £39,200 per annum for the other Directors. This assessment considered the level
of fees paid by the Company’s peers, taking into consideration the significant differences in the size and structure of companies across the
sector, and the expected workload of each of the Directors’ roles, which is expected to be higher than the average investment company due
to the requirement to approve each property acquisition and disposal and the complexities of tax and accounting matters that arise in relation
to the underlying property assets. After careful consideration, the Remuneration Committee concluded that it was appropriate to increase the
Directors’ fee levels with effect from 1 July 2021. The fees approved by the Remuneration Committee which are, in aggregate, 6% lower than
the external consultant’s recommendation, are set out below:
Chairman
Audit Committee Chair
Director
Year ending
30 June 2022
£’s
Year ended
30 June 2021
£’s
50,000
44,000
37,500
44,000
39,000
32,750
Annual Report on Directors’ Remuneration
Directors’ emoluments for the year (audited)
The Directors who served during the year received the following emoluments in the form of fees and, assuming there are no further changes
to the members of the Board, or their appointed roles, during the forthcoming year, are expected to receive the following in respect of the
year ending 30 June 2022. No other forms of remuneration or taxable benefits were paid during the year.
Malcolm Naish (Chairman)
Gordon Coull (Audit Committee Chair)
June Andrews
Tom Hutchison
Alison Fyfe (appointed 1 May 2020)
Vince Niblett (appointed 25 August 2021)
Hilary Jones (retired 4 September 2019)
Craig Stewart (retired 4 September 2019)
Total
Year ending
30 June 2022
(unaudited)
£’s
Year ended
30 June 2021
(audited)
£’s
Year ended
30 June 2020
(audited)
£’s
Change
in year ended
30 June 2021
%
50,000
44,000
37,500
37,500
37,500
31,250
–
–
237,750
44,000
39,000
32,750
32,750
32,750
–
–
–
181,250
44,000
39,000
32,750
32,750
5,459
–
2,959
2,959
159,877
–
–
–
–
600.0
–
(100.0)
(100.0)
13.4
The remuneration paid in relation to each Director remained unchanged in the year ended 30 June 2021. The increase in aggregate is due
primarily to the annualisation of the fee paid following the appointment of an additional Director, with Ms Fyfe being appointed towards the
end of the prior financial year.
Relative importance of spend on pay
The table below compares the change in the level of Directors’ remuneration compared to other expenses and distributions to shareholders.
Aggregate Directors’ remuneration
Management fee and other revenue expenses*
Distributions paid to shareholders in respect of the year
Year ended
30 June 2021
£’000
Year ended
30 June 2020
£’000
181
11,130
32,560
160
9,525
30,560
Change
%
+13.4
+16.9
+6.5
* As an investment company with an external manager, the Group does not have any employees other than the Directors. The Directors therefore deem the level of the
management fee and other revenue expenses, calculated in accordance with the Group’s usual accounting policies, to be an appropriate measure to assist in
understanding the relative importance of the Group’s spend on Directors’ pay.
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Target Healthcare REIT plc
Directors’ shareholdings (audited)
The Directors who held office at the year-end and their interests (all of which were beneficially held) in the ordinary shares of the Company as
at 30 June 2021 were as follows:
Malcolm Naish
June Andrews
Gordon Coull
Tom Hutchison
Alison Fyfe
Total
Ordinary shares
30 June 2021
Ordinary shares
30 June 2020
45,001
–
35,454
70,000
–
45,001
–
35,454
70,000
–
150,455
150,455
There have not been any changes in the Directors’ interests between 30 June 2021 and 19 October 2021. Mr Niblett did not hold any ordinary
shares in the Company at the date of his appointment nor at 19 October 2021.
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 28.
The graph below compares, from launch to 30 June 2021, the share price total return (assuming all dividends are reinvested) to ordinary
shareholders compared to the total return on the FTSE EPRA Nareit UK Index. The index was chosen for comparative purposes as it represents
the performance of real estate companies and REITs listed on the London Stock Exchange; however, it should be noted that this index will
contain types of property assets that may perform significantly differently from the care home properties within the Group’s investment remit.
Share Price Total Return and the FTSE EPRA Nareit UK Index Total Return Performance Graph (rebased to 100 at 7 March 2013)
200
190
180
170
160
150
140
130
120
110
100
90
80
70
30/6/13 31/12/13 30/6/14 31/12/14 30/6/15 31/12/15 30/6/16 31/12/16 30/6/17
31/12/17 30/6/18 31/12/18 30/6/19
31/12/19 30/6/20
31/12/20 30/6/21
FTSE EPRA Nareit UK Index Total Return
Share Price Total Return
Sources: EPRA, Target Fund Managers Limited
The share price total return performance included in the above graph is based on the listed share price of Target Healthcare REIT Limited to
7 August 2019 and, following the reconstruction of the Group to introduce a new listed parent company, Target Healthcare REIT plc thereafter.
Voting at Annual General Meeting on the Annual Directors’ Remuneration Report
At the Company’s previous AGM, held on 2 December 2020, shareholders approved the Directors’ Remuneration Report in respect of the year
ended 30 June 2020. 100 per cent of the votes cast were in favour of the resolution and votes withheld represented less than 0.3 per cent of
the shares in issue.
An ordinary resolution for the approval of this Annual Report on Directors’ Remuneration will be put to shareholders at the forthcoming
Annual General Meeting to be held on 14 December 2021.
On behalf of the Board
Alison Fyfe
Director
19 October 2021
Annual Report and Financial Statements 2021
49
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Independent Auditor’s Report
to the members of Target Healthcare REIT plc
Opinion
In our opinion:
– Target Healthcare REIT plc’s Group financial statements and parent company financial statements (the “financial statements”) give a true
and fair view of the state of the Group’s and of the parent company’s affairs as at 30 June 2021 and of the Group’s profit for the year then
ended;
– the Group financial statements have been properly prepared in accordance with International Accounting Standards in conformity with
the requirements of the Companies Act 2006 and, as regards the Group financial statements, International Financial Reporting Standards
adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union;
– the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting
Practice; and
– the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements of Target Healthcare REIT plc (the ‘parent company’) and its subsidiaries (the ‘Group’) for the year
ended 30 June 2021 which comprise:
Group
Parent company
Consolidated Statement of Comprehensive Income for the year
ended 30 June 2021
Statement of Financial Position as at 30 June 2021
Consolidated Statement of Financial Position as at 30 June 2021
Statement of Changes in Equity for the year ended 30 June 2021
Consolidated Statement of Changes in Equity for the year ended
30 June 2021
Related notes 1 to 13 to the financial statements including a summary
of significant accounting policies
Consolidated Statement of Cash Flows for the year ended
30 June 2021
Related notes 1 to 24 to the financial statements, including a
summary of significant accounting policies
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and
International Accounting Standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting
Standards adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union. The financial reporting framework that
has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards,
including FRS 101 “Reduced Disclosure Framework”.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under
those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are
independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK,
including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in
accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of
the financial statements is appropriate. Our evaluation of the directors’ assessment of the Group and parent company’s ability to continue to
adopt the going concern basis of accounting included:
– We confirmed our understanding of the Group’s going concern assessment process and engaged with the Directors and the Company
Secretary to determine if all key factors were considered in their assessment.
– We inspected the Directors’ assessment of going concern, including the revenue and expenses forecast, for the period to 31 December
2022 which is at least twelve months from the date the financial statements are authorised for issue. In preparing the revenue and expenses
forecast, the Group has concluded that it is able to continue to meet its ongoing costs as they fall due.
– We have reviewed the factors and assumptions, including the impact of the COVID-19 pandemic, as applied to the revenue and expenses
forecast. We considered the appropriateness of the methods used to calculate the revenue and expenses forecast, and determined,
through testing of the methodology and calculations, that the methods, inputs and assumptions utilised were appropriate to be able to
make an assessment for the Group.
– In relation to the Group’s borrowing arrangements, we inspected the Directors’ assessment of the risk of breaching the debt covenants as
a result of a reduction in the value of the Group’s portfolio. We recalculated the Group’s compliance with debt covenants in the scenarios
assessed by the Directors and performed reverse stress testing in order to identify what factors would lead to the Group breaching the
financial covenants.
– We considered the mitigating factors included in the revenue forecasts and covenant calculations that are within the control of the Group.
– We reviewed the Group’s going concern disclosures included in the annual report in order to assess that the disclosures were appropriate
and in conformity with the reporting standards.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or
collectively, may cast significant doubt on the Group and parent company’s ability to continue as a going concern for a period to
31 December 2022, which is at least 12 months from when the financial statements are authorised for issue.
In relation to the Group and parent company’s reporting on how they have applied the UK Corporate Governance Code, we have nothing
material to add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered
it appropriate to adopt the going concern basis of accounting.
50
Target Healthcare REIT plc
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue
as a going concern.
Overview of our audit approach
Key audit matters
– Incomplete or inaccurate recognition of rental income including accounting for fixed rental uplifts
and lease incentives
– Incorrect valuation or ownership, and the calculation of unrealised gains/(losses) of investment
properties and properties held for sale
Materiality
– Overall Group materiality of £5.65 million which represents 1% of Group net assets.
An overview of the scope of the Group and parent company audits
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for the
Group and Parent Company. This enables us to form an opinion on the Consolidated and Parent Company financial statements. We take into
account size, risk profile, the organisation of the Group and changes in the business environment when assessing the level of work to be
performed. All audit work was performed directly by the Group audit engagement team.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements
of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified.
These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing
the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in
our opinion thereon, and we do not provide a separate opinion on these matters.
Key observations communicated
to the Audit Committee
The results of our
procedures identified
no material misstatement
in relation to the risk of
incomplete or inaccurate
recognition of rental
income including
accounting for fixed rental
uplifts and lease incentives.
Risk
Our response to the risk
We performed the following procedures:
We obtained an understanding of the processes and
controls surrounding rental income recognition including
accounting for rental uplifts and lease incentives by
performing walkthrough procedures.
We have reviewed the Group’s accounting policies in
respect of rental income recognition and ensured they
have been consistently applied throughout the year and
are in accordance with applicable accounting standards.
We have verified 100% of the rental rates to lease
agreements and recalculated the rental income.
We re-performed the calculations of the rental
adjustments required for fixed rental uplifts and lease
incentives under IFRS 16 for all tenants and tested the
allocation between revenue and capital.
We agreed a sample of rental income recorded as
received to bank statements.
We tested that a sample of expected rent receipts
had been recorded with reference to executed lease
agreements to ensure completeness.
Incomplete or inaccurate recognition of rental
income including accounting for rental uplifts
and lease incentives (£49.91 million, 2020:
£44.24 million)
(Refer to Report of the Audit Committee (page 46)
and Accounting Policies (page 61))
The rental income receivable by the Group during
the period is a significant factor in the Group’s
decision to make a dividend payment to
shareholders. Rental income from the investment
properties is recognised on an accrual basis with
the exception of contingent rents which are
recognised on a receipt basis. The lease
agreements tend to have durations of multiple
years and minimum and maximum fixed annual
rental increase clauses. Leases may also include
lease incentives such as rent-free periods. IFRS 16
‘Leases’ requires that lessors recognise lease
payments as income on either a straight-line basis
or another systematic basis if that basis is more
representative of the pattern in which benefit
derived from the use of the underlying asset is
diminished.
During the year ended 30 June 2021, £49.91m
(2020: £44.24m) has been recognised as rental
income. Of this £41.17m (2020: £36.03m) has
been recorded as revenue in the Consolidated
Statement of Comprehensive Income and £8.74m
(2020: £8.22m) as capital relating to fixed rental
uplifts which are being spread over the applicable
lease term.
There is a risk of incomplete or inaccurate
recognition of income through the failure to
recognise the proper entitlements or applying
the appropriate accounting treatment.
Annual Report and Financial Statements 2021
51
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Key observations communicated
to the Audit Committee
The results of our
procedures identified no
material misstatement in
relation to the risk of
incorrect valuation or
ownership, and the
calculation of unrealised
gains/(losses) of investment
properties and properties
held for sale.
Independent Auditor’s Report
to the members of Target Healthcare REIT plc continued
Risk
Our response to the risk
Incorrect valuation or ownership, and the
calculation of unrealised gains/(losses) of
investment properties and properties held for
sale (£684.85 million; 2020: £617.58 million)
(Refer to Report of the Audit Committee (page 45);
Accounting policies (page 62); and Notes 9 and 10
to the Consolidated Financial Statements (pages
67 to 69)).
The valuation of the properties held in the
investment portfolio, and unrealised gains or losses
on the investment portfolio are the key drivers of
the Group’s net asset value and total return.
Incorrect pricing, including the judgement involved
in the valuation of property investments could
have a significant impact on the portfolio valuation
and the return generated for shareholders.
Failure to maintain proper legal title of the Group’s
Investments could result in assets not being
recognisable within the Consolidated Statement
of Financial Position.
The valuation of investment property requires
significant judgement and estimates by
management and the external valuers. Any input
inaccuracies or unreasonable bases used in these
judgements and estimates (such as in respect of
estimated rental value and yield profile applied)
could result in a material misstatement of the
Consolidated Statement of Financial Position
and in the Consolidated Statement of
Comprehensive Income.
The properties are valued externally on behalf
of the Group by Colliers International Healthcare
Property Consultants Limited (‘Colliers’) and
recorded in the Consolidated Financial Statements
at their carrying value, being the Colliers open
market valuation adjusted for the impact of lease
incentives and fixed rental uplifts.
At 30 June 2021, the Group’s investment portfolio
consists of UK healthcare properties, with a
market value of £677.53m (2020: £610.08m) and
carrying value of £629.61m (2020: £570.09m),
which is net of a deduction of £47.92m (2020:
£40.00m) to account for lease incentives and fixed
rental uplifts. The Group’s investment portfolio
also includes investment properties held for sale
at a value of £7.32m (2020: £7.50m).
We performed the following procedures:
We obtained an understanding of the processes and
controls surrounding investment valuation, legal title
and unrealised gains and losses by performing
walkthrough procedures.
We agreed the value of all the properties held at the
year end to the open market valuations included in
the valuation report provided by Colliers.
We agreed a sample of inputs used by Colliers in the
valuation to source data.
We used our property valuation specialists to perform
a review of the property valuations, which included:
– A review of the assumptions used by Colliers in
undertaking their valuation and an assessment of
the valuation methodology adopted;
– Discussions with Colliers which included a high-level
overview of the portfolio, covenant strength of the
tenants within the portfolio and historical rent cover
for a sample of properties; and
– A detailed assessment of a sample of the individual
property valuations, including properties which were
re-tenanted in the year, as at 30 June 2021 examining
key valuation inputs and assumptions applied.
Where our testing of models and model assumptions
identified instances where valuations were towards the
higher end of the expected range, we held further
discussions with Colliers and management. In those
discussions, we obtained detailed evidence including
overall quality and specification of the properties, latest
rental cover and trends, and both the location of the
care home and desirability of the asset to support the
explanations received. We concluded that all sampled
valuations were not materially misstated.
We reviewed the accounting policy and recalculated the
adjustments made to the Colliers fair value in respect of
lease incentives and rental smoothing, to validate the
carrying value of investment property.
We ensured the consolidated financial statements contain
adequate disclosures regarding the methods and
assumption used in the valuation, including the required
sensitivity analysis under IFRS 13 ‘Fair value measurement’.
We obtained direct confirmation from independent third
parties of the investment properties and development
sites held as at 30 June 2021.
We agreed a sample of key transaction details (e.g.
property and trade date) of purchases and sales recorded
by the Administrator to legal agreements, completion
statements and bank statements.
We recalculated the unrealised gains/losses on investment
properties as at the year-end using the book cost
reconciliation.
52
Target Healthcare REIT plc
In the prior year, our auditor’s report included a key audit matter in relation to the impact of COVID-19. The impact of COVID-19 on going
concern continued to be relevant to the audit of the Group and we considered this as part of our overall work on going concern, which is set
out under ‘Conclusions relating to going concern’. The other elements of the prior year key audit matter have not been included as a separate
key audit matter as it was determined that they did not have a significant impact on our audit strategy for this year’s audit.
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 £5.65 million (2020: £4.94 million), which is 1% (2020: 1%) of Group’s net assets. We believe that
net assets provides us with materiality aligned to a key measurement of the Group’s performance.
We determined materiality for the Parent Company to be £5.45 million (2020: £4.94 million), which is 1% (2020: 1%) of the Parent Company’s
net assets.
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% (2020: 75%) of our planning materiality, namely £4.24m (2020: £3.71m). 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.
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 £0.28m (2020: £0.25m),
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.
Other information
The other information comprises the information included in the annual report other than the financial statements and our auditor’s report
thereon. The directors are responsible for the other information contained within the annual report.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this
report, we do not express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the
financial statements or our knowledge obtained in the course of the audit or otherwise appears to be materially misstated. If we identify such
material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the
financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of the other
information, we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies
Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
– the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared
is consistent with the financial statements and those reports have been prepared in accordance with applicable legal requirements;
– the information about internal control and risk management systems in relation to financial reporting processes and about share capital
structures, given in compliance with rules 7.2.5 and 7.2.6 in the Disclosure Guidance and Transparency Rules sourcebook made by the
Financial Conduct Authority (the FCA Rules), is consistent with the financial statements and has been prepared in accordance with
applicable legal requirements; and
– information about the Group’s corporate governance statement and practices and about its administrative, management and supervisory
bodies and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the FCA Rules.
Annual Report and Financial Statements 2021
53
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Independent Auditor’s Report
to the members of Target Healthcare REIT plc continued
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the
audit, we have not identified material misstatements in:
– the strategic report or the directors’ report; or
– the information about internal control and risk management systems in relation to financial reporting processes and about share capital
structures, given in compliance with rules 7.2.5 and 7.2.6 of the FCA Rules
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if,
in our opinion:
– adequate accounting records have not been kept by the Group and parent company, or returns adequate for our audit have not been
received from branches not visited by us; or
– the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with
the accounting records and returns; or
– certain disclosures of directors’ remuneration specified by law are not made; or
– we have not received all the information and explanations we require for our audit; or
– a Corporate Governance Statement has not been prepared by the Group.
Corporate Governance Statement
The Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part of the Corporate
Governance Statement relating to the Group and parent company’s compliance with the provisions of the UK Corporate Governance Code
specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance
Statement is materially consistent with the financial statements or our knowledge obtained during the audit:
– Directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties
identified set out on page 32;
– Directors’ explanation as to its assessment of the company’s prospects, the period this assessment covers and why the period is
appropriate set out on page 32 and 33;
– Directors’ statement on fair, balanced and understandable set out on page 30;
– Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 32;
– The section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on
page 44; and;
– The section describing the work of the audit committee set out on pages 42 to 46.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement set out on page 37, the directors are responsible for the preparation of
the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine
is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group and parent company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors
either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the basis of these financial statements.
54
Target Healthcare REIT plc
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities,
outlined above, to detect irregularities, including fraud. The risk of not detecting a material misstatement due to fraud is higher than the risk of
not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations,
or through collusion. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.
However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the Group
and management.
– We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most
significant are International Accounting Standards in conformity with the Companies Act 2006, International Financial Reporting Standards
adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union, FRS 101 “Reduced Disclosure Framework”, the
Companies Act 2006, the Listing Rules, the UK Corporate Governance Code, the Association of Investment Companies’ Code and Statement
of Recommended Practice, Part 12 of the Corporation Tax Act 2010 and the Companies (Miscellaneous Reporting) Regulations 2018.
– We understood how the Group is complying with those frameworks through discussions with the Audit Committee and Company
Secretary and review of documented policies and procedures.
– We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur by
considering the key risks impacting the financial statements. We identified fraud risks with respect to the incomplete or inaccurate
recognition of rental income including accounting for fixed rental uplifts and lease incentives; and incorrect valuation and the calculation
of unrealised gains/(losses) of investment properties and properties held for sale. Further discussion of our approach is set out in the
section on key audit matters above.
– Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations. Our
procedures involved substantive audit procedures including a review of legal expenses incurred, review of the reporting to the Directors
with respect to the application of the documented policies and procedures and review of the financial statements to ensure compliance
with the reporting requirements of the Group and parent company.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website
at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Other matters we are required to address
– We were appointed as auditors by the Group, whose parent company at that time was Target Healthcare REIT Limited, on 10 September
2013. Following a group reconstruction in August 2019, Target Healthcare REIT plc became the parent company of the Group and
re-appointed us as auditor of the Group on 4 September 2019.
– The period of total uninterrupted engagement following reconstruction and including previous renewals and reappointments is two years,
covering the period ending 30 June 2021.
– The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent company and we remain
independent of the Group and the parent company in conducting the audit.
– The audit opinion is consistent with the additional report to the Audit Committee.
Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
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.
Caroline Mercer (Senior statutory auditor)
For and on behalf of Ernst & Young LLP, Statutory Auditor
Edinburgh
19 October 2021
Annual Report and Financial Statements 2021
55
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Consolidated Statement of Comprehensive Income
For the year ended 30 June 2021
Revenue
Rental income
Other income
Total revenue
Gains on revaluation of investment
properties
Gains on investment properties realised
(Losses)/gains on revaluation of
properties held for sale
Total income
Expenditure
Investment management fee
Credit loss allowance and bad debts
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 fair value of interest rate
swaps
Reclassification to profit and loss on
discontinuation of interest rate swaps
Total comprehensive income for
the year
Earnings per share (pence)
Notes
9
9
10
2
3
3
4
5
6
14
14
8
Year ended 30 June 2021
Year ended 30 June 2020
Revenue
£’000
41,168
73
41,241
–
–
–
Capital
£’000
8,739
–
8,739
9,536
1,306
Total
£’000
49,907
73
49,980
9,536
1,306
(92)
(92)
Revenue
£’000
36,025
23
36,048
–
–
–
41,241
19,489
60,730
36,048
(5,796)
(2,717)
(2,617)
(11,130)
–
–
–
–
(5,796)
(2,717)
(2,617)
(11,130)
(5,264)
(2,171)
(2,090)
(9,525)
Capital
£’000
8,219
–
8,219
198
642
1,505
10,564
–
–
(47)
(47)
Total
£’000
44,244
23
44,267
198
642
1,505
46,612
(5,264)
(2,171)
(2,137)
(9,572)
30,111
19,489
49,600
26,523
10,517
37,040
39
(4,850)
25,300
8
25,308
–
(913)
18,576
–
18,576
39
(5,763)
43,876
8
43,884
111
(4,388)
22,246
3
22,249
–
–
298
180
298
180
–
–
25,308
5.32
19,054
3.91
44,362
9.23
22,249
5.05
–
(1,144)
9,373
–
9,373
(232)
712
9,853
2.13
111
(5,532)
31,619
3
31,622
(232)
712
32,102
7.18
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.
56
Target Healthcare REIT plc
Consolidated Statement of Financial Position
As at 30 June 2021
Non-current assets
Investment properties
Trade and other receivables
Interest rate swaps
Current assets
Trade and other receivables
Cash and cash equivalents
Properties held for sale
Total assets
Non-current liabilities
Bank loans
Interest rate swaps
Trade and other payables
Current liabilities
Trade and other payables
Total liabilities
Net assets
Share capital and reserves
Share capital
Share premium
Merger reserve
Distributable reserve
Hedging reserve
Capital reserve
Revenue reserve
Equity shareholders’ funds
As at
30 June 2021
£’000
As at
30 June 2020
£’000
Notes
9
11
14
11
13
10
14
14
15
15
16
629,606
54,580
251
684,437
5,531
21,106
26,637
7,320
33,957
570,086
46,044
–
616,130
3,702
36,440
40,142
7,500
47,642
718,394
663,772
(127,904)
–
(6,840)
(150,135)
(227)
(6,183)
(134,744)
(156,545)
(18,465)
(13,114)
(153,209)
(169,659)
565,185
494,113
5,115
135,228
47,751
265,164
251
64,112
47,564
565,185
4,575
77,452
47,751
296,770
(227)
45,536
22,256
494,113
Net asset value per ordinary share (pence)
8
110.5
108.0
Company number: 11990238.
The financial statements on pages 56 to 76 were approved by the Board of Directors and authorised for issue on 19 October 2021 and were
signed on its behalf by:
Malcolm Naish
Chairman
The accompanying notes are an integral part of these financial statements.
Annual Report and Financial Statements 2021
57
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Consolidated Statement of Changes in Equity
For the year ended 30 June 2021
At 30 June 2020
4,575
77,452
47,751
296,770
(227)
45,536
22,256
494,113
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Distributable
reserve
£’000
Hedging
reserve
£’000
Capital
reserve
£’000
Revenue
reserve
£’000
Total
£’000
Notes
Total comprehensive income
for the year
Transactions with owners
recognised in equity:
Dividends paid
Issue of ordinary shares
Expenses of issue
At 30 June 2021
–
–
7
16
16
–
540
–
–
59,460
(1,684)
–
–
–
–
–
478
18,576
25,308
44,362
(31,606)
–
–
–
–
–
–
–
–
–
–
–
(31,606)
60,000
(1,684)
5,115
135,228
47,751
265,164
251
64,112
47,564
565,185
For the year ended 30 June 2020
At 30 June 2019
Total comprehensive
income for the year
Transactions with
owners recognised
in equity:
Group reconstruction
Reduction of share capital
Dividends paid
Issue of ordinary shares
Expenses of issue
At 30 June 2020
Notes
Stated
capital
account
£’000
372,685
–
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Distributable
reserve
£’000
Hedging
reserve
£’000
Capital
reserve
£’000
Revenue
reserve
£’000
Total
£’000
–
–
–
–
–
–
–
–
(707)
36,163
4,948
413,089
480
9,373
22,249
32,102
(371,292)
–
(1,393)
–
–
385,090
(381,239)
–
724
–
7
16
16
–
–
–
79,276
(1,824)
47,751
–
–
–
–
(61,549)
381,239
(22,920)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(4,941)
–
–
–
–
(29,254)
80,000
(1,824)
–
4,575
77,452
47,751
296,770
(227)
45,536
22,256
494,113
The accompanying notes are an integral part of these financial statements.
58
Target Healthcare REIT plc
Consolidated Statement of Cash Flows
For the year ended 30 June 2021
Cash flows from operating activities
Profit before tax
Adjustments for:
Interest receivable
Interest payable
Revaluation gains on investment properties and movements in lease incentives,
net of acquisition costs written off
Revaluation losses/(gains) on properties held for sale
Increase in trade and other receivables
Increase in trade and other payables
Interest paid
Interest received
Tax paid
Net cash inflow from operating activities
Cash flows from investing activities
Purchase of investment properties and properties held for sale, including acquisition costs
Disposal of investment properties and properties held for sale, net of lease incentives
Net cash outflow from investing activities
Cash flows from financing activities
Issue of ordinary share capital
Expenses of issue of ordinary share capital
Drawdown of bank loan facilities
Repayment of bank loan facilities
Expenses of arrangement of bank loan facilities
Dividends paid
Net cash inflow from financing activities
Net (decrease)/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
Fixed or guaranteed rent reviews derecognised on disposal or re-tenanting
Total
The accompanying notes are an integral part of these financial statements.
Year ended
30 June 2021
£’000
Year ended
30 June 2020
£’000
Notes
43,876
31,619
9
10
16
16
14
14
14
13
(39)
5,763
(19,581)
92
(2,782)
1,859
29,188
(4,266)
39
(5)
(4,232)
24,956
(111)
5,532
(9,059)
(1,505)
(1,238)
370
25,608
(4,177)
111
(73)
(4,139)
21,469
(51,400)
7,825
(43,575)
(117,501)
14,086
(103,415)
60,000
(1,684)
152,000
(174,000)
(1,538)
(31,493)
80,000
(1,824)
162,000
(118,000)
(1,585)
(29,151)
3,285
91,440
(15,334)
36,440
21,106
9,656
(1,556)
8,100
9,494
26,946
36,440
10,014
(988)
9,026
Annual Report and Financial Statements 2021
59
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Notes 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’) adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union, interpretations issued by the International
Financial Reporting Interpretations Committee, applicable legal and regulatory requirements of the Companies Act 2006 and the Listing Rules
of the Financial Conduct 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 April 2021, which the Group has adopted early, is consistent with the requirements of IFRS,
the Directors have sought to prepare the Consolidated 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.
Applicable standards and interpretations
The accounting policies adopted are consistent with those of the previous financial year, except that the following new amendments to the
standards have become effective in the current year:
– Amendment to IFRS 3: Definition of a Business
The amendment to IFRS 3: Business Combinations clarifies that to be considered a business, an integrated set of activities and assets must
include, at a minimum, an input and a substantive process that, together, significantly contribute to the ability to create output. Furthermore, it
clarifies that a business can exist without including all of the inputs and processes needed to create outputs. These amendments had no impact
on the Consolidated Financial Statements of the Group, but may impact future periods should the Group enter into any business combinations.
– Amendment to IFRS 16: COVID-19 Related Rent Concessions
On 28 May 2020, the IASB issued ‘COVID-19-Related Rent Concessions - amendment to IFRS 16: Leases’. The amendments provide relief
to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the
COVID-19 pandemic. As a practical expedient, a lessee may elect not to assess whether a COVID-19 related rent concession from a lessor
is a lease modification. A lessee that makes this election accounts for any change in lease payments resulting from the COVID-19 related
rent concession the same way it would account for the change under IFRS 16, if the change were not a lease modification. The practical
expedient cannot be applied by lessors and therefore had no impact on the Consolidated Financial Statements of the Group.
Several other amendments and interpretations apply for the first time in 2021, principally being ‘Amendments to IFRS 7, IFRS 9 and IAS 39
Interest Rate Benchmark Reform’ and ‘Amendments to IAS 1 and IAS 8 Definition of Material‘. These amendments do not have an impact on
the Consolidated Financial Statements of the Group.
Standards issued but not yet effective
The amendments resulting from Annual Improvements to IFRS Standards 2018-2020 will become effective for annual periods beginning on
or after 1 January 2022.
The Group does not consider that the future adoption of any new standards, amended standards or interpretations, in the form currently
available, will have any material impact on the Consolidated Financial Statements as presented.
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 ongoing basis.
Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
Revaluation of investment properties
Significant estimates and assumptions are made in the valuation of the investment properties and properties held for sale. The Group engaged
an independent valuation specialist to assess fair values for the investment properties and properties held for sale. The key assumptions used
to determine the fair value of the properties and sensitivity analyses are provided in notes 9, 10 and 17.
Property lease classification – Group as lessor
The Group has entered into commercial property leases on its investment property portfolio. The Group has determined, based on an
evaluation of the terms and conditions of the lease contracts, such as the lease term not constituting a major part of the economic life of the
commercial property, the present value of the minimum lease payments not amounting to substantially all of the fair value of the commercial
property and/or the potential for the property to be re-tenanted prior to the end of the expected lease term, that it has not transferred
substantially all the risks and rewards incidental to ownership of these properties and therefore accounts for the contracts as operating leases.
Provision for expected credit losses of rental income and trade receivables
The Group uses a provision matrix to calculate expected credit losses for rental income and trade receivables. The provision rates are initially
based on the Group’s historical observed default rates, adjusted for forward-looking information. At every reporting date, the historical
observed default rates are updated and changes in the forward-looking estimates are analysed. The continuing impact of COVID-19 is not
expected to have a material impact on the provision rates set based on the Group’s historical observed default rates. Where historical portfolio
losses are not thought an appropriate measure of expected credit losses based on the circumstances of particular tenants, the expected
credit losses are calculated by identifying scenarios that specify the amount and timing of cash flows for particular outcomes based on the
Group’s detailed knowledge, analysis and understanding of the financial standing of each individual rental income debtor (including, where
appropriate, consideration of rental guarantees, rental deposits and other forms of surety). The expected credit loss is calculated by weighting
the predicted loss under each scenario by an estimate of the probability of each of these outcomes.
60
Target Healthcare REIT plc
The assessment of the correlation between historical observed default rates, forward looking information and estimated credit losses is
a significant estimate, as is the assessment of the correlation between the identification of the potential scenarios that may arise and the
estimated probability of each such scenario occurring. The amount of estimated credit losses is sensitive to changes in the financial
circumstances of individual tenants and in forward-looking information. Further details are provided in notes 3 and 17.
Going concern
Given the potentially significant impact of COVID-19 on the economic conditions in which the Group is operating, the Directors have continued
to place a particular focus on the appropriateness of adopting the going concern basis in preparing the financial statements for the year ended
30 June 2021. The Group’s going concern assessment particularly considered that:
– The value of the Group’s portfolio of assets significantly exceeds the value of its liabilities, with the valuation yield applied to the portfolio
having tightened marginally since the start of the pandemic;
– The Group is contractually entitled to receive rental income which significantly exceeds its forecast expenses and loan interest;
– The Group remains within its loan covenants, with its finance facilities having been extended and increased during the period, resulting in
a weighted average term to maturity of 4.8 years at 30 June 2021 and an earliest repayment date of November 2023; and
– That the Group issued further ordinary shares in September 2021, raising gross proceeds of £125 million.
The forecast cash flows considered as part of the going concern assessment are based on the twelve months from the date of approval of
the financial statements as contained in the Group’s five-year viability model (as set out on pages 32 and 33). The viability model is based on a
severe but plausible downside scenario including the anticipated impact of COVID-19. Throughout this severe but plausible downside scenario
the Group has sufficient cash reserves and is forecast to remain within the financial covenants for each of its loan facilities for a period of at
least twelve months from the date of approval of these financial statements. The Group has a significant balance of cash and undrawn debt
available and the Group’s current policy is to prudently retain a proportion of this to ensure it can continue to pay the Group’s expenses and
loan interest in the unlikely scenario that the level of rental income received deteriorates significantly. The proportion retained will be kept
under review dependent on portfolio performance and market conditions.
Based on these considerations, the Directors consider that the Group has adequate resources to continue in operational existence for the
foreseeable future and at least the next twelve months from the date of issuance of this report. For this reason, they continue to adopt the
going concern basis in preparing the financial statements for the year ended 30 June 2021.
(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 2021.
Subsidiaries are those entities, including special purpose entities, controlled by the Company and further information is provided in note 12.
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 taking account of the following:
– The lease agreements on the properties held within the Group’s property portfolio generally allow for regular increases in the contracted
rental level in line with inflation, within a cap and a collar, or at a fixed level. Any rental income from such future fixed and minimum
guaranteed rent review uplifts is recalculated to reflect the actual rent uplift realised in the period and is recognised on a straight line basis
over the remainder of the lease term;
– 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 received.
Where income is recognised in advance of the related cash flows due to fixed or 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 or minimum guaranteed rent review uplifts on a straight line basis is
recognised in 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.
Property-related expenses which are not recoverable from tenants are recognised in expenses on an accruals basis.
(d) Expenses
Expenses are accounted for on an accruals basis and are inclusive of irrecoverable 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, except
where such costs relate wholly to capital matters such as the reorganisation of the Group’s equity structure or the early repayment of its
external loan facilities.
Annual Report and Financial Statements 2021
61
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Notes to the Consolidated Financial Statements continued
1. Accounting policies continued
(e) Dividends
Dividends are accounted for in the period in which they are paid.
(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 Group entered the UK REIT regime with effect from 1 June 2013. The Company entered the Group REIT regime with effect from 7 August
2019, the date at which it become the parent company of the Group. The Group’s subsidiaries all enter the Group REIT regime on acquisition/
incorporation. Entry to the regime results in, subject to continuing relevant UK-REIT criteria being met, the profits of the Group’s property
rental business, comprising both income and capital gains, being exempt from UK taxation.
The Group ensures that it complies with the UK-REIT regulations through monitoring the ongoing 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. 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.
(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.
For properties subject to contingent payment clauses within their purchase agreements, which will result in a further payment if certain
performance measures are met, this payment is recognised as a liability when the contracted performance conditions have been met and
a reliable estimate can be made of the amount. Any payment made will result in an increase in rental income receivable from the tenant, to
maintain the investment yield from the property, and therefore an asset of approximately equal value is recognised to reflect the fair value of
this increase in rental income.
Development interest (where income is receivable from a developer in respect of a forward-funding agreement) is deducted from the cost
of investment and shown as a receivable until settled.
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 Healthcare Property Consultants Limited, in
their capacity as external valuers, at the balance sheet date using recognised valuation techniques, appropriately adjusted for unamortised
lease incentives 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.
(i) Properties held for sale
Properties held for sale consist of properties whose carrying value is expected to be recovered principally through a sale transaction rather
than continuing use and which are available for immediate sale in their present condition. They are initially recognised at cost, being the fair
value of consideration given, and subsequently 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 Healthcare Property Consultants Limited, in
their capacity as external valuers, at the balance sheet date using recognised valuation techniques.
62
Target Healthcare REIT plc
(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
Rent receivables are carried at amortised cost. A provision for impairment of trade receivables is calculated through the expected credit loss
method in accordance with IFRS 9. As part of this expected credit loss process the following is taken into account: significant financial
difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments
(more than 30 days overdue). The carrying amount of the asset is reduced through use of an allowance account and the amount of loss is
recognised in the Statement of Comprehensive Income in other expenses, separately disclosed as an impairment. Bad debts are written off
once all avenues to recover the debt have been exhausted and the lease has ended, or a formal settlement agreement has been reached.
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.
(l) Interest-bearing bank loans and borrowings
All bank loans and borrowings are initially recognised at cost, being the 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 Statement of Financial Position 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.
The effective portion of the gains or losses arising on the fair value of cash flow hedges in the form of derivative instruments is reported
through Other Comprehensive Income and are recognised through the Hedging Reserve. The ineffective portion is recognised through profit
or loss in the Statement of Comprehensive Income. 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;
– 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 hedge must be effective meaning that there must be an economic relationship between the hedged item and the hedging instrument;
the effect of credit risk must not dominate the value changes that result from that economic relationship; and the hedge ratio of the
hedging relationship must be the same as that resulting from the quantity of the hedged item that the Group actually hedges and the
quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item; and
– At the inception of the hedge there must be formal designation and documentation of the hedging relationship and the Group’s risk
management objective and strategy for undertaking the hedge.
(n) Reserves
Share Premium
The share premium account represents the difference between the issue price of shares and their nominal value (excluding those issued
as part of the Group reconstruction). This reserve is non-distributable.
Merger Reserve
The merger reserve arose on the reconstruction of the Group in August 2019 (the ‘Group Reconstruction’) and represents the difference
between the nominal value and the fair value of the shares issued by the Company in exchange for the shares of the Group’s previous parent
company, Target Healthcare REIT Limited. This reserve is non-distributable.
Distributable Reserve
The distributable reserve represents the balance arising following the reduction of the nominal value of the shares issued as part of the Group
Reconstruction from £1.00 per share to £0.01 per share, as approved by the High Court in September 2019. The distributable reserve was
reduced by the difference between the fair value of the shares allotted by the Company, in exchange for the shares of Target Healthcare REIT
Limited, and the stated capital of Target Healthcare REIT Limited immediately prior to the Group Reconstruction.
This reserve is distributable. Any dividends paid in excess of the balance of the Company’s revenue reserve will be charged to this reserve.
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.
Annual Report and Financial Statements 2021
63
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Notes to the Consolidated Financial Statements continued
1. Accounting policies continued
(n) Reserves continued
Capital Reserve
The following are accounted for in the capital reserve:
– Gains and losses on the disposal of investment properties;
– Gains and losses on the disposal of properties held for sale;
– Increases and decreases in the fair value of investment properties and properties held for sale which are held at the period end;
– Rent adjustments which represent the effect of spreading uplifts and incentives;
– Other expenses or finance costs charged to the capital column of the Statement of Comprehensive Income;
– Taxation arising on the acquisition or disposal of investment properties or properties held for sale;
– Recovery of any cost/tax where the original expense/tax has also been charged to capital; 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 distributable reserve, is available for paying dividends.
2. Fee paid to the Investment Manager
Management fee
Total
Year ended
30 June 2021
£’000
Year ended
30 June 2020
£’000
5,796
5,796
5,264
5,264
The Group’s Investment Manager and Alternative Investment Fund Manager (‘AIFM’) is Target Fund Managers Limited. The Investment Manager
is entitled to an annual management fee calculated on a tiered basis based on the net assets of the Group as set out below. Where applicable,
VAT is payable in addition.
Net assets of the Group
Up to and including £500 million
Above £500 million and up to and including £750 million
Above £750 million and up to and including £1 billion
Above £1 billion and up to and including £1.5 billion
Above £1.5 billion
Management fee
percentage
1.05
0.95
0.85
0.75
0.65
The Investment Manager is entitled to an additional fee of £121,000 per annum (plus VAT), increasing annually in line with inflation, in relation
to their appointment as Company Secretary and Administrator to the Group.
The Investment Management Agreement can be terminated by either party on 24 months’ written notice. Should the Company terminate the
Investment Management Agreement earlier then compensation in lieu of notice will be payable to the Investment Manager. The Investment
Management Agreement may be terminated immediately without compensation if the Investment Manager: is in material breach of the
agreement; is guilty of negligence, wilful default or fraud; is the subject of insolvency proceedings; or there occurs a change of Key Managers
to which the Board has not given its prior consent.
3. Other expenses
Credit loss allowance
Bad debts written off
Valuation and other professional fees
Auditor’s remuneration for:
– statutory audit of the Company
– statutory audit of the Company’s subsidiaries
– review of interim financial information
Other taxation compliance and advisory*
Public relations and marketing
Directors’ fees
Secretarial and administration fees
Printing, postage and website
Listing & Registrar fees
Direct property costs
Other
Total
* The other taxation compliance and advisory fees were all paid to parties other than the Company’s Auditor.
64
Target Healthcare REIT plc
Year ended
30 June 2021
£’000
Year ended
30 June 2020
£’000
1,697
1,020
1,008
104
184
15
436
213
181
172
92
78
32
102
2,141
30
707
71
209
15
242
185
160
186
57
89
30
139
5,334
4,261
The valuers of the investment properties, Colliers International Healthcare 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.
Expenses are inclusive of irrecoverable VAT as the Company, and the majority of its subsidiaries, are not VAT registered.
4. Interest receivable
Deposit interest
Total
5. Interest payable and similar charges
Interest paid on bank loans
Amortisation of loan costs
Cost of early redemption
Total
Year ended
30 June 2021
£’000
Year ended
30 June 2020
£’000
39
39
111
111
Year ended
30 June 2021
£’000
Year ended
30 June 2020
£’000
4,276
574
913
5,763
3,616
772
1,144
5,532
During the year ended 30 June 2021, the Group amended its existing £50.0 million term loan and revolving credit facility with RBS and closed
out the interest rate swaps used to hedge the previous facility. The Group also amended its existing £80.0 million revolving credit facility with
HSBC. The costs of early redemption, including the release of the unamortised loan costs remaining at the time of restatement of both the
RBS and HSBC loans and the crystallisation of a loss of £180,000 on the early termination of the interest rate swaps that had previously been
recognised through other comprehensive income, totalled £913,000 and have been charged to capital. Further detail on the amended and
restated loans and the related interest rate swap entered into is provided in note 14.
6. Taxation
Current tax
Adjustment to tax charge for prior years
Total tax credit
Year ended
30 June 2021
£’000
Year ended
30 June 2020
£’000
–
(8)
(8)
–
(3)
(3)
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 19.0% (2020: 19.0%)
Effects of:
REIT exempt profits
REIT exempt gains
Capital allowances
Excess management expenses carried forward
Utilisation of excess expenses brought forward
Expenses not deductible for tax purposes
Adjustment to tax charge for prior years
Total tax credit
Year ended
30 June 2021
£’000
Year ended
30 June 2020
£’000
43,876
8,336
(5,468)
(1,920)
(1,343)
212
–
183
(8)
(8)
31,619
6,008
(4,713)
(260)
(1,188)
–
(73)
226
(3)
(3)
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.
The Group has unutilised tax losses carried forward in its residual business of £6.3 million at 30 June 2021 (2020: £5.2 million). No deferred tax
asset has been recognised on this amount as the Group cannot be certain that there will be taxable profits arising within its residual business
from which the future reversal of the deferred tax asset could be deducted.
Annual Report and Financial Statements 2021
65
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Notes to the Consolidated Financial Statements continued
7. Dividends
Amounts paid as distributions to equity holders during the year to 30 June 2021.
Fourth interim dividend for the year ended 30 June 2020
First interim dividend for the year ended 30 June 2021
Second interim dividend for the year ended 30 June 2021
Third interim dividend for the year ended 30 June 2021
Total
Amounts paid as distributions to equity holders during the year to 30 June 2020.
Fourth interim dividend for the year ended 30 June 2019
First interim dividend for the year ended 30 June 2020
Second interim dividend for the year ended 30 June 2020
Third interim dividend for the year ended 30 June 2020
Total
Dividend rate
(pence per
share)
Year ended
30 June 2021
£’000
1.67000
1.68000
1.68000
1.68000
6.71000
7,640
7,686
7,686
8,594
31,606
Dividend rate
(pence per
share)
Year ended
30 June 2020
£’000
1.64475
1.67000
1.67000
1.67000
6.65475
6,334
7,640
7,640
7,640
29,254
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 2021, of 1.68 pence per share, was paid on 27 August 2021 to shareholders
on the register on 13 August 2021 and amounted to £8,594,000. It is the intention of the Directors that the Group will continue to pay
dividends quarterly.
8. Earnings per share and Net Asset Value per share
Earnings per share
Revenue earnings
Capital earnings
Total earnings
Average number of shares in issue
Year ended 30 June 2021
Year ended 30 June 2020
£’000
Pence per share
£’000
Pence per share
25,308
18,576
43,884
5.32
3.91
9.23
22,249
9,373
31,622
5.05
2.13
7.18
475,406,929
440,278,234
There were no dilutive shares or potentially dilutive shares in issue.
EPRA is an industry body which issues best practice reporting guidelines for property companies and the Group report an EPRA NAV quarterly.
EPRA has issued best practice recommendations for the calculation of certain figures which are included below and on the following page.
Other EPRA measures are included in the EPRA Performance Measures on pages 94 and 95.
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 rental income arising from recognising guaranteed rental review uplifts
and for development interest received from developers in relation to monies advanced under forward fund agreements which, in the Group’s
IFRS financial statements, is required to be offset against the book cost of the property under development. The Board believes that the Group’s
specific adjusted EPRA earnings represents the underlying performance measure appropriate for the Group’s business model as it illustrates the
underlying revenue stream and costs generated by the Group’s property portfolio. The reconciliations are provided in the table below:
Earnings per IFRS Consolidated Statement of Comprehensive Income
Adjusted for gains on investment properties realised
Adjusted for revaluations of investment properties
Adjusted for revaluations of properties held for sale
Adjusted for other capital items
EPRA earnings
Adjusted for rental income arising from recognising guaranteed rent review uplifts
Adjusted for development interest under forward fund agreements
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
66
Target Healthcare REIT plc
Year ended
30 June 2021
£’000
Year ended
30 June 2020
£’000
43,884
(1,306)
(9,536)
92
913
34,047
(8,739)
647
25,955
9.23
7.16
5.46
31,622
(642)
(198)
(1,505)
1,191
30,468
(8,219)
975
23,224
7.18
6.92
5.27
Net Asset Value per share
The Group’s Net Asset Value per ordinary share of 110.5 pence (2020: 108.0 pence) is based on equity shareholders’ funds of £565,185,000
(2020: £494,113,000) and on 511,541,694 (2020: 457,487,640) ordinary shares, being the number of shares in issue at the year-end.
In October 2019, EPRA published new best practice recommendations for financial disclosures by public real estate companies for accounting
periods commencing after 1 January 2020. These introduced a new set of EPRA NAV metrics that are arrived at by adjusting the net asset
value calculated under International Financial Reporting Standards (‘IFRS’) to provide stakeholders with what EPRA believe to be the most
relevant information on the fair value of the assets and liabilities of a real estate investment company, under different scenarios. The three
EPRA NAV metrics are:
– EPRA Net Reinstatement Value (‘NRV’): Assumes that entities never sell assets and aims to represent the value required to rebuild the
entity. The objective is to highlight the value of net assets on a long-term basis. Assets and liabilities that are not expected to crystallise
in normal circumstances, such as the fair value movements on financial derivatives, are excluded and the costs of recreating the Group
through investment markets, such as property acquisition costs and taxes, are included.
– EPRA Net Tangible Assets (‘NTA’): Assumes that entities buy and sell assets, thereby crystallising certain levels of unavoidable deferred tax.
Given the Group’s REIT status, it is not expected that significant deferred tax will be applicable to the Group.
– EPRA Net Disposal Value (‘NDV’): Represents the shareholders’ value under a disposal scenario, where deferred tax, financial instruments
and certain other adjustments are calculated to the full extent of their liability, net of any resulting tax. At 30 June 2021, the Group held all
its material balance sheet items at fair value, or at a value considered to be a close approximation to fair value, in its financial statements
apart from its fixed-rate debt facility where the fair value is estimated to be higher than the nominal value. See note 14 for further details
on the Group’s loan facilities.
Given the nature of the Group’s assets and liabilities, the EPRA NTA is the same as the EPRA NAV reported in prior years, with the EPRA NDV
being the same as the previously reported EPRA NNNAV.
IFRS NAV per financial statements
Fair value of interest rate swaps
Fair value of loans
Estimated purchasers’ costs
2021
EPRA NRV
£’000
565,185
(251)
–
44,696
2021
EPRA NTA
£’000
565,185
(251)
–
–
2021
EPRA NDV
£’000
565,185
–
(1,389)
–
EPRA net assets
609,630
564,934
563,796
EPRA net assets (pence per share)
119.2
110.4
110.2
2020
EPRA NRV
£’000
494,113
227
–
40,916
535,256
117.0
2020
EPRA NTA
£’000
494,113
227
–
–
2020
EPRA NDV
£’000
494,113
–
(1,511)
–
494,340
492,602
108.1
107.7
9. Investment properties
Freehold and leasehold properties
Opening market value
Opening fixed or guaranteed rent reviews and lease incentives
Opening carrying value
Disposals – proceeds
– gain/(loss) on sale
Purchases
Acquisition costs capitalised
Acquisition costs written off
Unrealised (gain)/loss realised during the period
Revaluation movement – gains
Revaluation movement – losses
Movement in market value
Fixed or guaranteed rent reviews and lease incentives derecognised on disposal or re-tenanting
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
As at
30 June 2021
£’000
As at
30 June 2020
£’000
610,084
(39,998)
570,086
(7,616)
2,336
52,295
2,264
(2,264)
(1,030)
26,565
(5,109)
67,441
1,735
(9,656)
59,520
677,525
(47,919)
629,606
500,884
(31,288)
469,596
(14,402)
(438)
108,852
3,896
(3,896)
1,080
18,905
(4,797)
109,200
1,304
(10,014)
100,490
610,084
(39,998)
570,086
Annual Report and Financial Statements 2021
67
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information
Notes to the Consolidated Financial Statements continued
9. Investment properties continued
Changes in the valuation of investment properties
Gain/(loss) on sale of investment properties
Unrealised (gain)/loss realised during the period
Gains on sale of investment properties realised
Revaluation movement
Acquisition costs written off
Movement in lease incentives
Movement in fixed or guaranteed rent reviews
Gains on revaluation of investment properties
The investment properties can be analysed as follows:
Standing assets
Developments under forward fund agreements
Closing market value
Year ended
30 June 2021
£’000
Year ended
30 June 2020
£’000
2,336
(1,030)
1,306
21,456
(2,264)
(917)
(8,739)
10,842
(438)
1,080
642
14,108
(3,896)
(1,795)
(8,219)
840
As at
30 June 2021
£’000
As at
30 June 2020
£’000
655,175
22,350
677,525
597,484
12,600
610,084
The properties were valued at £677,525,000 (2020: £610,084,000) by Colliers International Healthcare Property Consultants Limited
(‘Colliers’), in their capacity as external valuers. The valuation was undertaken in accordance with the RICS Valuation – Global Standards,
incorporating the International Valuation Standards (the ‘Red Book Global’, 31 January 2020) issued by the Royal Institution of Chartered
Surveyors (‘RICS’) on the basis of Market Value, supported by reference to market evidence of transaction prices for similar properties. Colliers
has recent experience in the location and category of the investment properties being valued.
Market Value represents the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer
and a willing seller in an arm’s length transaction, after proper marketing where the parties had each acted knowledgeably, prudently and
without compulsion. The quarterly property valuations are reviewed by the Board at each Board meeting. The fair value of the properties
after adjusting for the movement in the fixed or guaranteed rent reviews and lease incentives was £629,606,000 (2020: £570,086,000).
The adjustment consisted of £41,949,000 (2020: £34,766,000) relating to fixed or guaranteed rent reviews and £5,970,000 (2020: £5,232,000)
of accrued income relating to the recognition of rental income over rent free periods subsequently amortised over the life of the lease, which
are both separately recorded in the accounts as non-current or current assets within ‘trade and other receivables’ (see note 11).
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. Other than one property where the leasehold expires in 2265, all leasehold properties have more
than 800 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 for identical assets or liabilities that the entity can access at the measurement date;
– Level 2: observable inputs other than quoted prices included within level 1;
– Level 3: use of inputs that are not based on observable market data.
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 a yield is applied to the asset which, along with the contracted rental level, is used to derive a market value.
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.
68
Target Healthcare REIT plc
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 (‘NIY’) on these assets, as measured by the EPRA topped up NIY, is 5.8 per cent. The yield on the majority of the individual assets ranges
from 5.0 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:
– Contracted rental level: the rent payable under the lease agreement at the date of valuation or, where applicable, on expiry of the rent free
period; and
– Yield: the yield is defined as the initial net income from a property at the date of valuation, expressed as a percentage of the gross purchase
price including the costs of purchase.
The contracted rental level and yield are not directly correlated although they may be influenced by similar factors. Rent is set at a long-term,
supportable level and is likely to be influenced by property-specific matters. The yield also reflects market sentiment and the strength of the
covenant provided by the tenant with a stronger covenant attracting a lower yield.
The lease agreements on the properties held within the Group’s property portfolio generally allow for annual increases in the contracted
rental level in line with inflation, within a cap and a collar. An increase of 1.0 per cent in the contracted rental level will increase the fair value
of the portfolio, and consequently the Group’s reported income from unrealised gains on investments, by £6.8 million (2020: £6.1 million);
an equal and opposite movement would have decreased net assets and decreased the Group’s income by the same amount.
A decrease of 0.25 per cent in the yield applied to the portfolio will increase the fair value of the portfolio by £30.1 million (2020: £26.3 million),
and consequently increase the Group’s reported income from unrealised gains on investments. An increase of 0.25 per cent in the net initial
yield will decrease the fair value of the portfolio by £27.7 million (2020: £24.3 million) and reduce the Group’s income.
10. Properties held for sale
Opening fair value
Purchases
Acquisition costs capitalised
Acquisition costs written off
Disposals – proceeds
– gain on sale
Unrealised gain realised during the period
Revaluation movement – gains
Closing fair value
As at
30 June 2021
£’000
As at
30 June 2020
£’000
7,500
300
–
–
(388)
34
(126)
–
7,320
–
5,695
300
(300)
–
–
–
1,805
7,500
The properties held for sale were valued at £7,320,000 (30 June 2020: £7,500,000) by Colliers International Healthcare Property Consultants
Limited (‘Colliers’). The properties held for sale consist of two blocks of apartments adjacent to an existing property holding which were
acquired to consolidate ownership of the overall retirement village. The intention is to sell the leasehold on the individual apartments.
11. Trade and other receivables
Non-current trade and other receivables
Fixed rent reviews
Rental deposits held in escrow for tenants
Lease incentives
Total
Current trade and other receivables
Lease incentives
VAT recoverable
Accrued income – rent receivable
Accrued development interest under forward fund agreements
Other debtors and prepayments
Total
As at
30 June 2021
£’000
As at
30 June 2020
£’000
41,949
6,840
5,791
54,580
34,766
6,183
5,095
46,044
As at
30 June 2021
£’000
As at
30 June 2020
£’000
179
732
955
739
2,926
5,531
137
184
1,520
996
865
3,702
At the year-end, trade and other receivables include a fixed rent review debtor of £41,949,000 (2020: £34,766,000) which represents the effect
of recognising guaranteed rental uplifts on a straight line basis over the lease term and £5,970,000 (2020: £5,232,000) of accrued income
relating to the recognition of rental income over rent free periods subsequently amortised over the life of the lease.
Annual Report and Financial Statements 2021
69
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information
Notes to the Consolidated Financial Statements continued
12. Investment in subsidiary undertakings
The Group included 50 subsidiary companies as at 30 June 2021 (30 June 2020: 46). All subsidiary companies were wholly owned, either
directly or indirectly, by the Company and, from the date of acquisition onwards, the principal activity of each company within the Group was
to act as an investment and property company. Other than one subsidiary incorporated in Jersey, two subsidiaries incorporated in Gibraltar
and two subsidiaries incorporated in Luxembourg, all subsidiaries are incorporated within the United Kingdom.
During the period, the Group incorporated four new subsidiaries, THR Number 37 Limited, THR Number 38 Limited, THR Number 39 Limited
and THR Number 40 Limited. The Group includes eight companies which were acquired as part of previous corporate acquisitions which are
currently dormant and which will be placed into liquidation imminently.
13. 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
14. Bank loans
Principal amount outstanding
Set-up costs
Amortisation of set-up costs
Total
As at
30 June 2021
£’000
As at
30 June 2020
£’000
19,330
1,776
21,106
16,545
19,895
36,440
As at
30 June 2021
£’000
As at
30 June 2020
£’000
130,000
(2,476)
380
127,904
152,000
(3,732)
1,867
150,135
On 5 November 2020, the Group entered into an amended and restated £70.0 million committed term loan and revolving credit facility with
the Royal Bank of Scotland plc (‘RBS’) which is repayable in November 2025. Interest accrues on the bank loan at a variable rate, based on
SONIA plus margin and mandatory lending costs, and is payable quarterly. The margin is 2.18 per cent per annum on £50.0 million of the
facility and 2.33 per cent per annum on the remaining £20.0 million of the revolving credit facility, both for the duration of the loan. A
non-utilisation fee of 1.13 per cent per annum is payable on the first £20 million of any undrawn element of the facility, reducing to 1.05 per
cent per annum thereafter. Prior to the amendment, the interest on the £50.0 million facility was based on LIBOR plus a margin of 1.50 per
cent per annum and a non-utilisation fee of 0.75 per cent per annum. As at 30 June 2021, the Group had drawn £30.0 million under this
facility (30 June 2020: £50.0 million).
On 5 November 2020, the Group entered into an amended and restated £100.0 million revolving credit facility with HSBC Bank plc (‘HSBC’)
which is repayable in November 2023, with the option of two one-year extensions thereafter subject to the consent of HSBC. Interest accrues
on the bank loan at a variable rate, based on SONIA plus margin and mandatory lending costs, and is payable quarterly. The margin is 2.17 per
cent per annum for the duration of the loan and a non-utilisation fee of 0.92 per cent per annum is payable on any undrawn element of the
facility. Prior to the amendment, the interest on the £80.0 million facility was based on LIBOR plus a margin of 1.70 per cent per annum and a
non-utilisation fee of 0.75 per cent per annum. As at 30 June 2021, the Group had drawn £50.0 million under this facility (30 June 2020:
£52.0 million).
The Group has a £50.0 million committed term loan facility with ReAssure which is repayable on 12 January 2032. Interest accrues on the loan at
an aggregate fixed rate of interest of 3.28 per cent per annum and is payable quarterly. As at 30 June 2021, the Group had drawn £50.0 million
under this facility (30 June 2020: £50.0 million).
The following interest rate swaps were in place during the year ended 30 June 2021:
Notional Value
Starting Date
Ending Date
Interest paid
Interest received
Counterparty
21,000,000
9,000,000
30,000,000
24 June 2019
7 April 2017
5 November 2020
1 September 2021*
1 September 2021*
5 November 2025
0.70%
0.86%
0.30%
RBS
3-month LIBOR
3-month LIBOR
RBS
Daily compounded SONIA (floor at -0.08%) RBS
* These interest rate swaps were closed out in November 2020 at the time of amendment of the related loan. The cost of such early redemption was recognised in capital
as described in note 5.
Inclusive of all interest rate swaps, the interest rate on £80.0 million of the Group’s borrowings is fixed, inclusive of the amortisation of
arrangement costs, at an all-in rate of 3.16 per cent per annum until at least 5 November 2025. The remaining £140.0 million of debt, of which
£50.0 million was drawn at 30 June 2021, would, if fully drawn, carry interest at a variable rate equal to SONIA plus a weighted average lending
margin, inclusive of the amortisation of arrangement costs, of 2.44 per cent per annum.
The fair value of the interest rate swaps at 30 June 2021 was an aggregate asset of £251,000 (30 June 2020: liability of £227,000) and all
interest rate swaps are categorised as level 2 in the fair value hierarchy (see note 9 for further explanation of the fair value hierarchy).
70
Target Healthcare REIT plc
At 30 June 2021, the nominal value of the Group’s loans equated to £130,000,000 (2020: £152,000,000). Excluding the interest rate swaps
referred to above, the fair value of these loans, based on a discounted cashflow using the market rate on the relevant treasury plus an estimated
margin based on market conditions at 30 June 2021, totalled, in aggregate, £131,389,000 (2020: £153,511,000). The payment required to
redeem the loans in full, incorporating the terms of the Spens clause in relation to the ReAssure facility, would have been £139,748,000 (2020:
£165,974,000). The loans are categorised as level 3 in the fair value hierarchy.
The RBS loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number One plc Group (‘THR1 Group’)
which consists of THR1 and its two subsidiaries. The ReAssure loan is secured by way of a fixed and floating charge over the majority of the
assets of the THR Number 12 plc Group (‘THR12 Group’) which consists of THR12 and its four subsidiaries. The HSBC loan is secured by way of
a fixed and floating charge over the majority of the assets of the THR Number 15 plc Group (‘THR15 Group’) which consists of THR15 and its 18
subsidiaries (excluding those subsidiaries which are currently dormant). In aggregate, the Group has granted a fixed charge over properties with
a market value of £526 million as at 30 June 2021 (2020: £496 million).
Under the bank covenants related to the loans, the Group is to ensure that:
– the loan to value percentage for each of THR1 Group and THR15 Group does not exceed 50 per cent;
– the loan to value percentage for THR12 Group does not exceed 60 per cent; and
– the interest cover, or equivalent, for each of THR1 Group, THR12 Group and THR15 Group is greater than c.300 per cent on any calculation
date.
All bank loan covenants have been complied with during the year.
Analysis of net debt:
Opening balance
Cash flows
Non-cash flows
Cash and cash
equivalents
2021
£’000
36,440
(15,334)
–
Borrowing
2021
£’000
(150,135)
23,538
(1,307)
Net debt
2021
£’000
(113,695)
8,204
(1,307)
Closing balance as at 30 June
21,106
(127,904)
(106,798)
Cash and cash
equivalents
2020
£’000
26,946
9,494
–
36,440
Borrowing
2020
£’000
(106,420)
(42,511)
(1,204)
Net debt
2020
£’000
(79,474)
(33,017)
(1,204)
(150,135)
(113,695)
15. Trade and other payables
Non-current trade and other payables
Rental deposits
Total
Current trade and other payables
Rental income received in advance
Property acquisition and development costs accrued
Investment Manager’s fees payable
Interest payable
Tax payable
Other payables
Total
The Group’s payment policy is to ensure settlement of supplier invoices in accordance with stated terms.
16. Share capital
Allotted, called-up and fully paid ordinary shares of £0.01 each
Opening Balance
Issued on 1 March 2021
Balance as at 30 June 2021
As at
30 June 2021
£’000
As at
30 June 2020
£’000
6,840
6,840
6,183
6,183
As at
30 June 2021
£’000
As at
30 June 2020
£’000
5,719
8,182
1,551
969
–
2,044
18,465
Number of shares
457,487,640
54,054,054
511,541,694
5,835
3,430
1,364
779
13
1,693
13,114
£’000
4,575
540
5,115
Under the Company’s Articles of Association, the Company may issue an unlimited number of ordinary shares. Ordinary shareholders are
entitled to all dividends declared by the Company and to all of the Company’s assets after repayment of its borrowings and ordinary creditors.
Ordinary shareholders have the right to vote at meetings of the Company. All ordinary shares carry equal voting rights.
During the year to 30 June 2021, the Company issued 54,054,054 (2020: 72,398,191) ordinary shares raising gross proceeds of £60,000,000
(2020: £80,000,000). The consideration received in excess of the par value of the ordinary shares issued, net of the expenses of issue of
£1,684,000 (2020: £1,824,000), has been credited to the share premium account. See note 23 for details of ordinary shares issued subsequent
to the year end.
During the year to 30 June 2021, the Company did not repurchase any ordinary shares into treasury (2020: nil) or resell any ordinary shares
from treasury (2020: nil). At 30 June 2021, the Company did not hold any shares in treasury (2020: nil).
Annual Report and Financial Statements 2021
71
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Notes to the Consolidated Financial Statements continued
16. Share capital continued
Capital management
The Group’s capital is represented by the share capital, share premium, merger reserve, distributable reserve, hedging reserve, capital reserve,
revenue reserve and long-term borrowings. The Group is not subject to any externally-imposed capital requirements, other than the financial
covenants on its loan facilities as detailed in note 14.
The capital of the Group is managed in accordance with its investment policy, in pursuit of its investment objective.
Capital risk management
The objective of the Group is to provide ordinary shareholders with an attractive level of income together with the potential for income and
capital growth from investing in a diversified portfolio of freehold and long leasehold care homes that are let to care home operators; and
other healthcare assets in the UK.
The Board has responsibility for ensuring the Group’s ability to continue as a going concern. This involves the ability to borrow monies in
the short and long term; and pay dividends out of reserves, all of which are considered and approved by the Board on a regular basis.
To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders,
issue new shares or buyback shares for cancellation or for holding in treasury. The Company may also increase or decrease its level of
long-term borrowings.
Where ordinary shares are held in treasury these are available to be sold to meet on-going market demand. The ordinary shares will be
sold only at a premium to the prevailing NAV per share. The net proceeds of any subsequent sales of shares out of treasury will provide the
Company with additional capital to enable it to take advantage of investment opportunities in the market and make further investments in
accordance with the Company’s investment policy and within its appraisal criteria. Holding shares in treasury for this purpose assists the
Company in matching its on-going capital requirements to its investment opportunities and therefore reduces the negative effect of holding
excess cash on its balance sheet over the longer term.
No changes were made in the capital management objectives, policies or processes during the year.
17. Financial instruments
Consistent with its objective, the Group holds UK care home property investments. In addition, the Group’s financial instruments comprise
cash, bank loans and receivables and payables that arise directly from its operations. The Group’s exposure to derivative instruments consists
of interest rate swaps used to fix the interest rate on the Group’s variable rate borrowings.
The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk,
liquidity risk, interest rate risk and market price risk. There is no foreign currency risk as all assets and liabilities of the Group are maintained
in pounds sterling.
The Board reviews and agrees policies for managing the Group’s risk exposure. These policies are summarised below and have remained
unchanged for the year under review. These disclosures include, where appropriate, consideration of the Group’s investment properties which,
whilst not constituting financial instruments as defined by IFRS, are considered by the Board to be integral to the Group’s overall risk exposure.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group.
At the reporting date, the Group’s financial assets exposed to credit risk amounted to £24,563,000 (2020: £39,854,000), consisting of cash
of £21,106,000 (2020: £36,440,000), net rent receivable of £955,000 (2020: £1,520,000), accrued development interest of £739,000 (2020:
£996,000) and other debtors of £1,763,000 (2020: £898,000).
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. The expected
credit risk in relation to tenants is an inherent element of the due diligence considered by the Investment Manager on all property transactions
with an emphasis being placed on ensuring that initial rents are set at a sustainable level. The risk is further mitigated by rental deposits or
guarantees where considered appropriate. The majority of rental income is received in advance.
As at 30 June 2021, the Group had recognised a credit loss allowance totalling £4,098,000 against a gross rent receivable balance of
£4,641,000 and gross loans to tenants totalling £1,262,000. Whilst this allowance has increased during the year ended 30 June 2021, it
remains low relative to the Group’s overall balance sheet, and relates primarily to the tenant of two immature homes which are now trading
well as described on page 17. As at 30 June 2020, the gross rent receivable was £3,922,000, of which £660,000 was subsequently recovered,
£753,000 was written off and £2,509,000 is still outstanding. There were no other financial assets which were either past due or considered
impaired at 30 June 2021 (2020: 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.
72
Target Healthcare REIT plc
Should the Group hold significant cash balances for an extended period, then counterparty risk will be spread, by placing cash across different
financial institutions. At 30 June 2021 the Group held £20.9 million (2020: £36.4 million) with The Royal Bank of Scotland plc and £0.2 million
(2020: £nil) with HSBC Bank plc.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments.
The Group’s investments comprise UK care homes. Property and property-related assets in which the Group invests are not traded in an
organised public market and may be illiquid. As a result, the Group may not be able to liquidate quickly its investments in these properties
at an amount close to their fair value in order to meet its liquidity requirements.
The Group’s liquidity risk is managed on an 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 2021
Cash
Rental deposits held in escrow for tenants
Other debtors
Total
Financial assets as at 30 June 2020
Cash
Rental deposits held in escrow for tenants
Other debtors
Total
Three months
or less
£’000
More than three
months but less
than one year
£’000
1-2 years
£’000
2-5 years
£’000
21,106
–
3,457
24,563
–
–
–
–
–
–
–
–
–
–
–
–
Three months
or less
£’000
More than three
months but less
than one year
£’000
1-2 years
£’000
2-5 years
£’000
36,440
–
3,414
39,854
–
–
–
–
–
–
–
–
At the reporting date, the maturity of the financial liabilities was:
Financial liabilities as at 30 June 2021
Bank loans and interest rate swaps
Rental deposits
Other payables
Total
Financial liabilities as at 30 June 2020
Bank loans and interest rate swaps
Rental deposits
Other payables
Total
Three months
or less
£’000
More than three
months but less
than one year
£’000
1,106
–
12,746
13,852
3,282
–
–
3,282
Three months
or less
£’000
More than three
months but less
than one year
£’000
1,009
–
7,279
8,288
2,993
–
–
2,993
1-2 years
£’000
4,388
–
–
4,388
1-2 years
£’000
104,562
–
–
104,562
More than
five years
£’000
–
6,840
–
6,840
More than
five years
£’000
–
6,183
–
6,183
More than
five years
£’000
59,094
6,840
–
65,934
More than
five years
£’000
60,734
6,183
–
66,917
Total
£’000
21,106
6,840
3,457
31,403
Total
£’000
36,440
6,183
3,414
46,037
Total
£’000
156,120
6,840
12,746
175,706
Total
£’000
174,222
6,183
7,279
187,684
–
–
–
–
2-5 years
£’000
88,250
–
–
88,250
2-5 years
£’000
4,924
–
–
4,924
The total amount due under the bank facilities includes the expected hedged interest payments due under both the loan and interest rate
swaps combined (see note 14 for further details) assuming that both the drawn element of the loans and the notional value of the interest rate
swaps remain unchanged from 30 June 2021 until the repayment date of the relevant loan and expiry date of the related interest rate swap.
The interest rate on any unhedged element of the loans is based on the rate of SONIA at 30 June 2021 (three-month LIBOR at 30 June 2020)
plus the relevant lending margin. The commitment fee payable on the undrawn element of any facility is included, where applicable.
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. At 30 June 2021, interest was being received on
cash at a weighted average variable rate of nil (2020: 0.01 per cent). Exposure varies throughout the period as a consequence of changes in
the composition of the net assets of the Group arising out of the investment and risk management policies. These balances expose the Group
to cash flow interest rate risk as the Group’s income and operating cash flows will be affected by movements in the market rate of interest.
Annual Report and Financial Statements 2021
73
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Notes to the Consolidated Financial Statements continued
17. Financial instruments continued
The Group has £170.0 million (2020: £130.0 million) of committed term loans and revolving credit facilities which were charged interest at a
rate of SONIA (2020: three-month LIBOR) plus the relevant margin. At the year-end £80.0 million of the variable rate facilities had been drawn
down (2020: £102.0 million). The fair value of the variable rate borrowings is affected by changes in the market rate of the lending margin that
would apply to similar loans. The variable rate borrowings are carried at amortised cost and the Group considers this to be a close
approximation to fair value at 30 June 2021 and 30 June 2020.
The Group has not hedged its exposure on £50.0 million of the drawn variable rate borrowings at 30 June 2021 (2020: £72.0 million). On
these loans the interest was payable at a variable rate equal to SONIA (2020: three-month LIBOR) plus the weighted average lending margin,
including the amortisation of costs, of 2.43 per cent per annum (2020: 2.17 per cent). The variable rate borrowings 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 £50.0 million fixed rate term loan (2020: £50.0 million) and has hedged its exposure on £30.0 million (2020: £30.0 million) of
the variable rate loans, as referred to above, through entering into a fixed rate interest rate swap. Fixing the interest rate exposes the Group to
fair value interest rate risk as the fair value of the fixed rate borrowings, or the fair value of the interest rate swap used to fix the interest rate on
an otherwise variable rate loan, will be affected by movements in the market rate of interest. The £50.0 million fixed rate term loan is carried at
amortised cost on the Group’s balance sheet, with the estimated fair value and cost of repayment being disclosed in note 14, whereas the fair
value of the interest rate swap is recognised directly on the Group’s balance sheet. At 30 June 2021, an increase of 0.25 per cent in interest
rates would have increased the fair value of the interest rate swap asset and increased the reported total comprehensive income for the year
by £0.3 million (2020: £0.1 million). The same movement in interest rates would have decreased the fair value of the fixed rate term loan by
£1.1 million (2020: £1.2 million); however, as the fixed rate loan is held at amortised cost, the reported total comprehensive income for the
year would have remained unchanged. A decrease in interest rates would have had an approximately equal and opposite effect.
Further details on the Group’s borrowings are detailed in note 14.
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
Bank loan
As at 30 June 2021
As at 30 June 2020
Fixed rate
£’000
–
(80,000)
(80,000)
Variable rate
£’000
21,106
(50,000)
(28,894)
Fixed rate
£’000
–
(80,000)
(80,000)
Variable rate
£’000
36,440
(72,000)
(35,560)
Based on the Group’s exposure to cash flow interest rate risk, an increase of 0.25 per cent in interest rates would have decreased the reported profit
for the year and the net assets at the year end by £72,000 (2020: £89,000), a decrease in interest rates would have an equal and opposite effect.
These movements are calculated based on balances as at 30 June 2021 (30 June 2020) 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 and the properties held for sale are disclosed in
note 10. A 10 per cent increase in the carrying value of the investment properties and properties held for sale as at 30 June 2021 (30 June 2020)
would have increased net assets available to shareholders and increased the net income for the year by £63.7 million (2020: £57.8 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 may not be reflective of future
market conditions.
18. Capital commitments
The Group had capital commitments as follows:
Amounts due to complete forward fund developments
Other capital expenditure commitments
Total
74
Target Healthcare REIT plc
30 June 2021
£’000
30 June 2020
£’000
21,054
3,158
24,212
5,394
530
5,924
19. Contingent assets and liabilities
As at 30 June 2021, twelve (2020: ten) properties within the Group’s investment property portfolio contained deferred consideration clauses
meaning that, subject to contracted performance conditions being met, deferred payments totalling £20.03 million (2020: £18.03 million)
may be payable by the Group to the vendors/tenants of these properties. The potential timings of these payments are also conditional on the
date(s) at which the contracted performance conditions are met and are therefore uncertain.
It is highlighted that any deferred consideration subsequently paid will result in an increase in the rental income due from the tenant of the
relevant property. As the net initial yield used to calculate the additional rental which would be payable is not significantly different from the
investment yield used to arrive at the valuation of the properties, any deferred consideration paid would be expected to result in a
commensurate increase in the value of the Group’s investment property portfolio.
Having assessed each clause on an individual basis, the Group has determined that the contracted performance conditions were highly likely
to be met in relation to one of these properties and therefore an amount of £1.55 million has been recognised as a liability at 30 June 2021
(2020: £nil). An equal but opposite amount has been recognised in other debtors to reflect the increase in the investment property value that
would be expected to arise were the deferred consideration to be paid and the contracted rental income increased accordingly.
20. 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 one and two years
Between two and three years
Between three and four years
Between four and five years
Over five years
Total
As at
30 June 2021
£’000
41,068
41,951
42,762
43,398
44,061
1,269,202
As at
30 June 2020
£’000
38,437
39,925
40,557
41,158
41,805
1,220,165
1,482,442
1,422,047
The largest single tenant at the year-end accounted for 13.1 per cent (2020: 11.5 per cent) of the current annual rental income. There were
no unoccupied properties at the year-end (2020: none).
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
remaining of between 13 and 35 years.
21. 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 Group. The Directors of the Group received fees for their services. Total fees for the year were
£181,000 (2020: £160,000) of which £12,000 (2020: £12,000) remained payable at the year-end.
The Investment Manager received £5,796,000 (inclusive of irrecoverable VAT) in management fees in relation to the year ended 30 June 2021
(2020: £5,264,000). Of this amount £1,551,000 (2020: £1,364,000) remained payable at the year-end. The Investment Manager received a
further £146,000 (inclusive of irrecoverable VAT) during the year ended 30 June 2021 (2020: £129,000) in relation to its appointment as
Company Secretary and Administrator, of which £36,000 (2020: £35,000) remained payable at the year end. Certain employees of the
Investment Manager are directors of some of the Group’s subsidiaries. Neither they nor the Investment Manager receive any additional
remuneration in relation to fulfilling this role.
There were related party transactions within the Group and its wholly-owned subsidiaries which are eliminated upon consolidation.
22. 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 NTA. The reconciliation between
the NAV, as calculated under IFRS, and the EPRA NTA 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.
Annual Report and Financial Statements 2021
75
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Notes to the Consolidated Financial Statements continued
23. Post balance sheet events
Property transactions
Subsequent to the year end, practical completion was achieved at the Group’s development site in Rudheath, Cheshire, delivering a 68-bed
care home. The home was completed under a fixed-priced forward-fund arrangement and leased to L&M Healthcare, an existing tenant of
the Group, on a 30-year lease with RPI-linked increases, subject to a cap and collar. Similarly, practical completion was achieved at the Group’s
development site in Droitwich Spa, Worcestershire and leased to the Group’s largest tenant, Ideal Carehomes.
In addition the Company has acquired one operational care home and two forward fund developments, committing total capital of £32.0 million,
plus acquisition costs.
Equity issuance
On 9 September 2021, the Company issued 108,695,652 ordinary shares at a price of 115.0 pence per share, raising gross proceeds of
£125 million.
24. Alternative Investment Fund Managers (‘AIFM’) Directive
With effect from 22 July 2014, the Company’s Investment Manager was authorised as an AIFM by the FCA under the AIFMD regulations.
In accordance with the AIFM Directive, information in relation to the Group’s leverage and the remuneration of the Company’s AIFM,
Target Fund Managers Limited, is required to be made available to investors. The Manager has provided disclosures on its website,
www.targetfundmanagers.com, incorporating the requirements of the AIFMD regulations regarding remuneration.
The Group’s maximum and average actual leverage levels at 30 June 2021 are shown below:
Leverage exposure
Maximum limit
Actual
Gross
method
Commitment
method
3.00
1.50
3.00
1.53
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 swaps 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 Association. 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 in the Investor Disclosure Document which
is made available on the Group’s website at www.targethealthcarereit.co.uk.
76
Target Healthcare REIT plc
Company Statement of Financial Position
As at 30 June 2021
Non-current assets
Investment in subsidiary undertakings
Investment properties
Trade and other receivables
Current assets
Trade and other receivables
Cash and cash equivalents
Total assets
Non-current liabilities
Trade and other payables
Current liabilities
Trade and other payables
Total liabilities
Net assets
Share capital and reserves
Share capital
Share premium
Merger reserve
Distributable reserve
Capital reserve
Revenue reserve
Equity shareholders’ funds
Net asset value per ordinary share (pence)
Company number: 11990238
As at
30 June 2021
£’000
As at
30 June 2020
£’000
Notes
3
4
5
5
6
7
7
8
8
9
509,228
20,506
1,046
530,780
32,411
3,024
35,435
457,731
6,595
403
464,729
32,062
5,556
37,618
566,215
502,347
(240)
(79)
(2,179)
(2,419)
(9,666)
(9,745)
563,796
492,602
5,115
135,228
47,751
326,713
47,652
1,337
563,796
4,575
77,452
47,751
358,319
6,077
(1,572)
492,602
110.2
107.7
The Company made a profit for the year ended 30 June 2021 of £44,484,000 (2020: £4,505,000).
The financial statements on pages 77 to 86 were approved by the Board of Directors and authorised for issue on 19 October 2021 and were
signed on its behalf by:
Malcolm Naish
Chairman
The accompanying notes are an integral part of these financial statements.
Annual Report and Financial Statements 2021
77
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Company Statement of Changes in Equity
For the year ended 30 June 2021
At 30 June 2020
Total comprehensive income for the year
Transactions with owners recognised in equity:
Dividends paid
Issue of ordinary shares
Expenses of issue
Share
capital
£’000
4,575
–
–
540
–
Notes
2
8
8
Share
premium
£’000
Merger
reserve
£’000
Distributable
reserve
£’000
77,452
47,751
358,319
Capital
reserve
£’000
6,077
Revenue
reserve
£’000
Total
£’000
(1,572) 492,602
–
–
59,460
(1,684)
–
–
–
–
–
41,575
2,909
44,484
(31,606)
–
–
–
–
–
–
–
–
(31,606)
60,000
(1,684)
At 30 June 2021
5,115
135,228
47,751
326,713
47,652
1,337
563,796
For the year ended 30 June 2020
At 30 June 2019
Total comprehensive income for the year
Transactions with owners recognised in equity:
Group reconstruction
Reduction of share capital
Dividends paid
Issue of ordinary shares
Expenses of issue
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Distributable
reserve
£’000
Notes
–
–
–
–
–
–
–
–
Capital
reserve
£’000
–
Revenue
reserve
£’000
–
Total
£’000
–
6,077
(1,572)
4,505
385,090
(381,239)
–
724
–
2
8
8
–
–
–
79,276
(1,824)
47,751
–
–
–
–
–
381,239
(22,920)
–
–
–
–
–
–
–
–
–
–
–
–
432,841
–
(22,920)
80,000
(1,824)
At 30 June 2020
4,575
77,452
47,751
358,319
6,077
(1,572)
492,602
The accompanying notes are an integral part of these financial statements.
78
Target Healthcare REIT plc
Notes to the Company 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
The Company Financial Statements have been prepared in accordance with FRS 101: Reduced Disclosure Framework and applicable legal
and regulatory requirements of the Companies Act 2006.
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 April 2021, which the Company has adopted early, is consistent with the requirements of FRS 101,
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.
The results of the Company have been included in the Consolidated Financial Statements as presented on pages 56 to 76. The accounting
policies adopted are consistent with those adopted by the Group as stated in note 1 to the Consolidated Financial Statements. The only
additional policies applied are in relation to investments in subsidiary undertakings and dividends received and these are set out below.
The Company has taken advantage of the following exemptions permitted under FRS 101:
– an exemption from preparing the Company cash flow statement and related notes;
– an exemption from listing any new or revised standards that have not been adopted or providing information about their likely impact; and
– an exemption from disclosing transactions between the Company and its wholly-owned subsidiaries.
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 and at least the next twelve months from the date of issuance of this
report. This assessment took into consideration the potential impact of COVID-19 as set out in the Strategic Report. For this reason, they
continue to adopt the going concern basis in preparing the financial statements.
Further explanation of the assessment undertaken is provided in the Consolidated Financial Statements on page 61.
Investments in subsidiary undertakings
Investments in subsidiary undertakings are stated at fair value with changes in fair value recognised in profit or loss. Investments in subsidiaries
are initially recognised at fair value at the date at which control is acquired, with subsequent gains or losses arising from changes in fair value
being recognised in net profit or loss for the period as a capital item and transferred to the Capital Reserve. Investments in subsidiaries are
derecognised at the date on which the Company transfers control and substantially all the risks and rewards of ownership to another party.
Dividends received
Dividends received are recognised on the date on which entitlement to receive payment is established. Where dividends are received by way
of an in-specie transfer of assets from a subsidiary undertaking, the dividend is recognised at the fair value of the assets received through profit
or loss as a capital item and transferred to the Capital Reserve.
Company Profit for the financial year
Under Section 408 of the Companies Act 2006 the Company is exempt from the requirement to present its own profit and loss account.
The profit after tax for the year was £44,484,000 (2020: £4,505,000).
The Company does not have any employees (2020: nil). Details of the Directors’ fees paid during the year are disclosed in the Group’s
Remuneration Report and in note 3 to the Consolidated Financial Statements. The Company has paid the Directors’ fees which equated to
£181,000 during the year ended 30 June 2021 (2020: £117,000).
Audit fees in relation to the parent company were £106,000 (2020: £74,000), including irrecoverable VAT. This included £2,000 payable by the
Company on behalf of certain subsidiaries (2020: £3,000). The fee for assurance related services, being the review of the Company’s Interim
Report, was £15,000 (2020: £15,000). There were no other non-audit fees paid to E&Y LLP by the Company during the year (2020: £nil).
Annual Report and Financial Statements 2021
79
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Notes to the Company Financial Statements continued
2. Dividends
Amounts paid as distributions to equity holders.
Fourth interim dividend for the prior year
First interim dividend
Second interim dividend
Third interim dividend
Total
Dividend rate
(pence per share)
Year ended
30 June 2021
£’000
Dividend rate
(pence per share)
Year ended
30 June 2020
£’000
1.67
1.68
1.68
1.68
6.71
7,640
7,686
7,686
8,594
31,606
–
1.67
1.67
1.67
5.01
–
7,640
7,640
7,640
22,920
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 2021, of 1.68 pence per share, was paid on 27 August 2021 to shareholders
on the register on 13 August 2021 and amounted to £8,594,000. It is the intention of the Directors that the Group will continue to pay
dividends quarterly.
3. Investments in subsidiary undertakings
As at 30 June 2021, the Company’s directly held subsidiary undertakings were:
Name
Target Healthcare REIT Limited
THR Number 12 plc
THR Number 36 Limited
THR Number 37 Limited
THR Number 38 Limited
THR Number 39 Limited
THR Number 40 Limited
Total
Country of
incorporation
Jersey
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
Class of
Capital
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
% of class
held
% of equity
held
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Book Cost
£’000
432,841
81,487
17,446
2,174
6,665
–
–
Fair Value
£’000
397,629
85,311
19,001
1,506
5,923
(142)
–
540,613
509,228
The registered office of Target Healthcare REIT Limited at 30 June 2021 was: 3rd Floor, 44 Esplanade, St Helier, Jersey JE4 9WG.
The movement in the fair value of the Company’s investment in subsidiary undertakings during the year was:
Opening fair value
Additions
Movement in fair value
Closing fair value
Year ended
30 June 2021
£’000
Year ended
30 June 2020
£’000
457,731
9,363
42,134
509,228
–
531,250
(73,519)
457,731
The Group’s investments in subsidiary undertakings are classified within level 3 of the fair value hierarchy. See note 9 to the Consolidated
Financial Statements for the definitions of the levels of the fair value hierarchy.
The fair value of the Group’s subsidiaries is primarily dependent on the fair value of the properties and bank loans that they hold. See notes 9,
10, 14 and 17 to the Consolidated Financial Statements for an explanation of the Group’s valuation processes, the significant inputs, and the
sensitivities of the fair value of these assets and liabilities to these significant inputs.
80
Target Healthcare REIT plc
As at 30 June 2021, the Company’s indirectly held subsidiary undertakings were:
Name
Country of incorporation
Class of Capital
% of class held
% of equity held
THR Number One plc
THR Number Two Limited
THR Number 3 Limited
THR Number 4 Limited
THR Number 5 Limited
THR Number 6 Limited
THR Number 7 Limited
THR Number 8 Limited
THR Number 9 Limited
THR Number 10 Limited
THR Number 11 Limited
THR Number 13 Limited
THR Number 14 Limited
THR Number 15 plc
THR Number 16 Limited
THR Number 17 (Holdings) Limited
THR Number 17 Limited
THR Number 18 Limited
THR Number 19 Limited
THR Number 20 Limited
THR Number 21 Limited
THR Number 22 Limited
THR Number 23 Limited
THR Number 24 Limited
THR Number 25 S.à r.l.
THR Number 26 S.à r.l.
THR Number 27 Limited
THR Number 28 Limited
THR Number 29 Limited
THR Number 30 Limited
THR Number 31 Limited
THR Number 32 Limited
THR Number 33 Limited
THR Number 34 Limited
THR Number 35 Limited
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
Gibraltar
Gibraltar
England & Wales
England & Wales
Scotland
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
Luxembourg
Luxembourg
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
The registered office of the companies incorporated in England & Wales is: Level 13, Broadgate Tower, 20 Primrose Street, London EC2A 2EW.
The registered office of the companies incorporated in Luxembourg is: 1, rue Jean-Pierre Brasseur, L – 1258, Luxembourg.
The registered office of the companies incorporated in Gibraltar is: Suite 23, Portland House, Glacis Road, GX11 1AA, Gibraltar.
The registered office of the company incorporated in Scotland is: Laurel House, Laurelhill Business Park, Stirling FK7 9JQ.
The Group had a further eight indirectly held subsidiary undertakings, which were acquired during the prior year. As these companies have
been dormant since acquisition and will be placed into liquidation imminently, these are not listed above.
Annual Report and Financial Statements 2021
81
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Notes to the Company Financial Statements continued
4. Investment properties
Freehold properties
Opening market value
Opening fixed or guaranteed rent reviews and lease incentives
Opening carrying value
Purchases
Disposals – proceeds
Acquisition costs capitalised
Acquisition costs written off
Revaluation movement – gains
Movement in market value
Fixed or guaranteed rent reviews and lease incentives derecognised on disposal
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
As at
30 June 2021
£’000
As at
30 June 2020
£’000
6,919
(324)
6,595
14,228
–
733
(733)
173
14,401
–
(490)
13,911
21,320
(814)
20,506
–
–
–
25,083
(18,400)
1,857
(1,857)
236
6,919
29
(353)
6,595
6,919
(324)
6,595
The properties were valued at £21,320,000 (2020: £6,919,000) by Colliers International Healthcare Property Consultants Limited (‘Colliers’),
in their capacity as external valuers. The valuation was undertaken in accordance with the RICS Valuation Global Standards, incorporating
the International Valuation Standards (the ‘Red Book Global’, 31 January 2020) issued by the Royal Institution of Chartered Surveyors (‘RICS’)
on the basis of Market Value, supported by reference to market evidence of transaction prices for similar properties. Colliers has recent
experience in the location and category of the investment properties being valued.
Market Value represents the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer
and a willing seller in an arm’s length transaction, after proper marketing where the parties had each acted knowledgeably, prudently and
without compulsion. The quarterly property valuations are reviewed by the Board at each Board meeting. The fair value of the properties after
adjusting for the movement in the fixed or guaranteed rent reviews and lease incentives was £20,506,000 (2020: £6,595,000). The adjustment
consisted of £567,000 (2020: £76,000) relating to fixed or guaranteed rent reviews and £247,000 (2020: £248,000) of accrued income relating
to the recognition of rental income over rent free periods subsequently amortised over the life of the lease, which are both separately
recorded in the accounts as non-current or current assets within ‘trade and other receivables’ (see note 5).
Considering the Company’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. See note 9 to the
Consolidated Financial Statements for further details on the valuation process, methodology and classification.
The Company’s investment property portfolio, which consisted solely of care homes during the year, is considered to be a single class of
assets. The weighted average net initial yield on these assets, as measured by the EPRA topped up NIY, is 5.7 per cent. The yield on the
individual assets ranges from 5.4 per cent to 6.4 per cent. There have been no changes to the valuation technique used through the period,
nor have there been any transfers between levels.
The lease agreement on the properties held within the Company’s portfolio allows for an annual increase in the contracted rental level in line
with inflation, within a cap and a collar. An increase of 1.0 per cent in the contracted rental level will increase the fair value of the portfolio, and
consequently the Company’s reported income from unrealised gains on investments, by £213,000 (2020: £69,000); an equal and opposite
movement would have decreased net assets and reduced the Company’s income by the same amount.
A decrease of 0.25 per cent in the yield applied to the portfolio will increase the fair value of the portfolio by £972,000 (2020: £281,000),
and consequently increase the Company’s reported income from unrealised gains on investments. An increase of 0.25 per cent in the net
initial yield will decrease the fair value of the portfolio by £891,000 (2020: £260,000) and reduce the Company’s income.
82
Target Healthcare REIT plc
5. Trade and other receivables
Non-current trade and other receivables
Fixed rent reviews
Rental deposits held in escrow for tenants
Lease incentives
Total
Current trade and other receivables
Lease incentives
Balances due from group undertakings
Other debtors and prepayments
Total
As at
30 June 2021
£’000
As at
30 June 2020
£’000
567
240
239
1,046
76
79
248
403
As at
30 June 2021
£’000
As at
30 June 2020
£’000
8
32,204
199
32,411
–
31,922
140
32,062
At the year-end, trade and other receivables include a fixed rent review debtor of £567,000 (2020: £76,000) which represents the effect of
recognising guaranteed rental uplifts on a straight line basis over the lease term and £247,000 (2020: £248,000) of accrued income relating
to the recognition of rental income over rent free periods subsequently amortised over the life of the lease.
The balances due from group undertakings are unsecured and interest is receivable at a fixed rate of 1.5 per cent per annum or such other
interest rate that may be agreed from time to time between the Company and the relevant counterparty. The balances are repayable on demand.
6. Cash and cash equivalents
Cash at bank and in hand
Short-term deposits
Total
All cash balances at the year-end were held in cash, current accounts or deposit accounts.
7. Trade and other payables
Non-current trade and other payables
Rental deposits
Total
Current trade and other payables
Balances due to group undertakings
Income tax payable
Investment Manager’s fees payable
Other payables
Total
As at
30 June 2021
£’000
As at
30 June 2020
£’000
3,024
–
3,024
13
5,543
5,556
As at
30 June 2021
£’000
As at
30 June 2020
£’000
240
240
79
79
As at
30 June 2021
£’000
As at
30 June 2020
£’000
–
812
412
955
2,179
8,199
699
326
442
9,666
The balances due to group undertakings are unsecured and interest is payable at a fixed rate of 1.5 per cent per annum or such other interest
rate that may be agreed from time to time between the Company and the relevant counterparty. The balances are repayable on demand.
The Group’s payment policy is to ensure settlement of supplier invoices in accordance with stated terms.
Annual Report and Financial Statements 2021
83
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Notes to the Company Financial Statements continued
8. Share capital
Allotted, called-up and fully paid ordinary shares of £0.01 each
Opening Balance
Issued on 1 March 2021
Balance as at 30 June 2021
Number of shares
457,487,640
54,054,054
511,541,694
£’000
4,575
540
5,115
Under the Company’s Articles of Association, the Company may issue an unlimited number of ordinary shares. Ordinary shareholders are
entitled to all dividends declared by the Company and to all of the Company’s assets after repayment of its borrowings and ordinary creditors.
Ordinary shareholders have the right to vote at meetings of the Company. All ordinary shares carry equal voting rights.
During the year to 30 June 2021, the Company issued 54,054,054 (2020: 72,398,191) ordinary shares raising gross proceeds of £60,000,000
(2020: £80,000,000). The consideration received in excess of the par value of the ordinary shares issued, net of the expenses of issue of
£1,684,000 (2020: £1,824,000), has been credited to the share premium account.
During the year to 30 June 2021, the Company did not repurchase any ordinary shares into treasury (2020: nil) or resell any ordinary shares
from treasury (2020: nil). At 30 June 2021, the Company did not hold any shares in treasury (2020: nil).
Capital Management
The Company’s capital is represented by the share capital, share premium, merger reserve, distributable reserve, capital reserve and revenue
reserve and is managed in line with the policies set out for the Group on page 72.
9. Net Asset Value
The Company’s net asset value per ordinary share of 110.2 pence (2020: 107.7 pence) is based on equity shareholders’ funds of £563,796,000
(2020: £492,602,000) and on 511,541,694 (2020: 457,487,640) ordinary shares, being the number of shares in issue at the year end.
10. Financial instruments
Consistent with its objective, the Company holds UK care home property investments. In addition, the Company’s financial instruments
comprise investments in subsidiaries, cash and receivables and payables that arise directly from its operations. The Company has no direct
exposure to derivative instruments.
The Company 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 Company are maintained
in pounds sterling.
The Board reviews and agrees policies for managing the Group’s overall risk exposure. These policies are summarised in note 17 to the
Consolidated Financial Statements and have remained unchanged for the year under review. The following disclosures include, where
appropriate, consideration of the Company’s investment properties which, whilst not constituting financial instruments as defined by FRS 101,
are considered by the Board to be integral to the Company’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 Company.
At the reporting date, the Company’s financial assets exposed to credit risk amounted to £35,228,000 (2020: £37,478,000) consisting of
balances due from Group undertakings of £32,204,000 (2020: £31,922,000) and cash balances of £3,024,000 (2020: £5,556,000).
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments.
The Company’s investments comprise UK care homes and holdings in subsidiary undertakings which, in turn, invest in UK care homes. Property
and property-related assets in which the Company invests are not traded in an organised public market and may be illiquid. As a result, the
Company may not be able to liquidate quickly its investments in these properties or subsidiary undertakings at an amount close to their fair
value in order to meet its liquidity requirements.
84
Target Healthcare REIT plc
Liquidity risk continued
At the reporting date, the maturity of the financial assets was:
Financial assets as at 30 June 2021
Cash and cash equivalents
Rental deposits held in escrow for tenants
Balances due from group undertakings
Total
Financial assets as at 30 June 2020
Cash and cash equivalents
Rental deposits held in escrow for tenants
Balances due from group undertakings
Total
Three months
or less
£’000
More than three
months but less
than one year
£’000
1-2 years
£’000
2-5 years
£’000
3,024
–
32,204
35,228
–
–
–
–
–
–
–
–
–
–
–
–
Three months
or less
£’000
More than three
months but less
than one year
£’000
1-2 years
£’000
2-5 years
£’000
5,556
–
31,922
37,478
–
–
–
–
–
–
–
–
–
–
–
–
At the reporting date, the maturity of the financial liabilities was:
Financial liabilities as at 30 June 2021
Rental deposits
Other payables
Total
Financial liabilities as at 30 June 2020
Rental deposits
Balances due to group undertakings
Other payables
Total
Three months
or less
£’000
More than three
months but less
than one year
£’000
–
2,179
2,179
–
–
–
Three months
or less
£’000
More than three
months but less
than one year
£’000
1-2 years
£’000
2-5 years
£’000
–
–
–
–
–
–
1-2 years
£’000
2-5 years
£’000
–
8,199
1,467
9,666
–
–
–
–
–
–
–
–
–
–
–
–
More than
five years
£’000
–
240
–
240
More than
five years
£’000
–
79
–
79
More than
five years
£’000
240
–
240
More than
five years
£’000
79
–
–
79
Total
£’000
3,024
240
32,204
35,468
Total
£’000
5,556
79
31,922
37,557
Total
£’000
240
2,179
2,419
Total
£’000
79
8,199
1,467
9,745
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 Company’s policy is to hold cash in variable rate or short-term fixed rate bank accounts. Interest
is received on cash at a weighted average variable rate which was nil at 30 June 2021 (2020: 0.01 per cent).
The following table sets out the carrying amount of the Company’s financial instruments that are exposed to interest rate risk:
Cash and cash equivalents
Balances due from group undertakings
Balances due to group undertakings
Total
As at 30 June 2021
As at 30 June 2020
Fixed rate
£’000
–
32,204
–
32,204
Variable rate
£’000
Fixed rate
£’000
Variable rate
£’000
3,024
–
–
3,024
–
31,922
(8,199)
23,723
5,556
–
–
5,556
Based on the Company’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 £8,000 (2020: £14,000), a decrease in interest rates would have an equal and
opposite effect. These movements are calculated based on balances as at 30 June 2021 (30 June 2020) 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 Company’s subsidiaries are held at fair value which, in turn, reflects the
external valuations of the underlying properties they hold. The Company’s overall market price risk is therefore the same as that for the Group
as set out in note 17 to the Consolidated Financial Statements.
Annual Report and Financial Statements 2021
85
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Notes to the Company Financial Statements continued
11. 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 one and two years
Between two and three years
Between three and four years
Between four and five years
Over five years
Total
As at
30 June 2021
£’000
As at
30 June 2020
£’000
1,325
1,349
1,374
1,399
1,424
54,391
61,262
469
484
491
499
506
18,860
21,309
At 30 June 2021, the largest single tenant accounted for 63.2 per cent (2020: 100 per cent) of the current annual rental income. There were
no unoccupied properties at the period end.
The Company 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 remaining of between 33 and 34 years.
12. 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.
The Directors of the Company received fees for their services. Total fees paid by the Company in relation to the year were £181,000 (2020:
£117,000) of which £12,000 (2020: £12,000) remained payable at the year-end.
The Investment Manager received management fees of £1,334,000 (inclusive of irrecoverable VAT) from the Company in relation to the year
ended 30 June 2021 (2020: £1,232,000). Of this amount £412,000 (2020: £326,000) remained payable at the year-end.
The Investment Manager received a further £146,000 (inclusive of irrecoverable VAT) during the year ended 30 June 2021 (2020: £129,000) in
relation to its appointment as Company Secretary and Administrator. Of this amount £36,000 (2020: £35,000) remained payable at the year-end.
13. Post balance sheet events
On 9 September 2021, the Company issued 108,695,652 ordinary shares at a price of 115.0 pence per share, raising gross proceeds of
£125 million.
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Target Healthcare REIT plc
Notice of Annual General Meeting
NOTICE IS HEREBY GIVEN that the third Annual General Meeting (‘AGM’) of Target Healthcare REIT plc (the ‘Company’) will be held on
Tuesday 14 December 2021 at 4.00 p.m. at the offices of Dickson Minto W.S., 16 Charlotte Square, Edinburgh EH2 4DF for the purposes of
considering and, if thought fit, passing the following resolutions, of which resolutions 1 to 10 inclusive will be proposed as ordinary resolutions
and resolutions 11 to 13 inclusive will be proposed as special resolutions:
Ordinary resolutions
1. That the Annual Report and Accounts for the year ended 30 June 2021 be received.
2. That the Directors’ Annual Report on Remuneration for the year ended 30 June 2021 be approved.
3. That the Company’s dividend policy be approved.
4. That Ernst & Young LLP be re-appointed as the Company’s Auditor until the conclusion of the next Annual General Meeting.
5. That the Directors be authorised to determine the Auditor’s remuneration.
6. To elect Vince Niblett as a Director.
7. To re-elect Malcolm Naish as a Director.
8. To re-elect Gordon Coull as a Director.
9. To re-elect Alison Fyfe as a Director.
10. That, in addition to any existing authority, in accordance with section 551 of the Companies Act 2006, the Directors be generally and
unconditionally authorised to exercise all powers of the Company to allot ordinary shares of £0.01 each (or of such other nominal value
as the Directors may resolve) in the capital of the Company up to an aggregate nominal amount equal to 10% of the Company’s issued
share capital immediately prior to the passing of this resolution, provided that this authority shall, unless renewed, varied or revoked by the
Company, expire at the conclusion of the next Annual General Meeting of the Company or on 15 months from the passing of this resolution,
whichever is the earlier, save that the Company may, before such expiry, make offers or agreements which would or might require Securities
to be allotted and the Directors may allot Securities in pursuance of such offer or agreement notwithstanding that the authority conferred
by this resolution has expired.
Special resolutions
11. That, subject to the passing of resolution 10, the Directors be given the general power, pursuant to section 570 of the Companies Act 2006
(the ‘Act’), to allot equity securities (as defined in section 560 of the Act) for cash pursuant to the authority under section 551 of the Act
either conferred by resolution 10 or by way of a sale of treasury shares as if section 561 of the Act did not apply to any such allotment,
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 expiry of 15
months from the passing of this resolution, whichever is the earlier, unless renewed, varied or revoked by the Company prior to or
on such date, and save that the Company may, before such expiry, make offers or agreements 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
notwithstanding that the power conferred by this resolution has expired; and
(b) shall be limited to the allotment of equity securities for cash up to an aggregate nominal amount equal to 10% of the nominal value of
the issued share capital of the Company immediately prior to the passing of this resolution.
12. To authorise the Company generally and unconditionally to make market purchases (within the meaning of section 693(4) of the Companies
Act 2006) of ordinary shares of £0.01 each (or of such other nominal value as the Directors of the Company shall resolve) provided that:
(a) the maximum aggregate number of ordinary shares that may be purchased is 92,973,578 ordinary shares or, if less, 14.99% of the issued
ordinary share capital of the Company immediately prior to the passing of this resolution (excluding treasury shares);
(b) the minimum price (excluding expenses) which may be paid for each ordinary share is the nominal value at the time of purchase;
(c) the maximum price (excluding expenses) which may be paid for each ordinary share is the higher of:
(i) 105% of the average market value of an ordinary share in the Company for the five business days prior to the day the purchase is made; and
(ii) the higher of the last independent trade and the highest current independent bid on the London Stock Exchange; and
(d) unless previously varied, revoked or renewed, the authority hereby conferred shall expire at the conclusion of the Company’s next
Annual General Meeting or on 15 months from the passing of this resolution, whichever is the earlier, save that the Company may,
before the expiry of the authority granted by this resolution, enter into a contract to purchase ordinary shares which will or may be
executed wholly or partly after the expiry of such authority.
13. That, the Company be and is hereby generally and unconditionally authorised to hold general meetings (other than Annual General
Meetings) on 14 clear days’ notice, such authority to expire at the conclusion of the next Annual General Meeting of the Company or 15
months from the passing of this resolution, whichever is the earlier.
By order of the Board
Target Fund Managers Limited
Company Secretary
Registered office:
Level 13, Broadgate Tower
20 Primrose Street
London
EC2A 2EW
19 October 2021
Annual Report and Financial Statements 2021
87
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Notice of Annual General Meeting continued
Notes:
1. Only those shareholders registered in the Company’s register of members at 10.00 p.m. on 10 December 2021 or, if the meeting is
adjourned, 10.00 p.m. on the day two working days prior to the adjourned meeting, shall be entitled to attend and vote at the meeting.
Changes to the register of members after the relevant deadline shall be disregarded in determining the rights of any person to attend and
vote at the meeting.
2. Information regarding the meeting, including the information required by section 311A of the Companies Act 2006 (the ‘Act’), can be found
at www.targethealthcarereit.co.uk.
3. As a member you are entitled to appoint a proxy to exercise all or any of your rights to attend, speak and vote at the meeting and you
should have received a proxy form with this notice of meeting. A proxy does not need to be a shareholder of the Company but must attend
the 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 procedures 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 financial statements and proxy form) to
communicate with the Company for any purpose other than those expressly stated.
4. Shareholders can: (a) appoint a proxy and give proxy instructions by returning the enclosed proxy form by post (see Note 5); or (b) if a
CREST member, register their proxy appointment by utilising the CREST electronic proxy appointment service (see Note 6); or (c) via the
Proxymity platform (see Note 7). Appointment of a proxy does not preclude you from attending the meeting and voting in person. If you
have appointed a proxy and attend the meeting and vote in person, your proxy appointment will automatically be terminated.
5. The notes to the proxy form explain how to direct your proxy how to vote on each resolution or withhold their vote. To appoint a proxy
using the proxy form, the form must be: (a) completed and signed; (b) sent or delivered to Computershare Investor Services PLC at
The Pavilions, Bridgwater Road, Bristol BS99 6ZY; and (c) received by Computershare Investor Services PLC no later than 4.00 p.m. on
10 December 2021 or, in the event of an adjournment of the meeting, 48 hours before the adjourned meeting. In the case of a shareholder
which is a company, the proxy form must be executed under its common seal or signed on its behalf by an officer of the company or an
attorney for the company. Any power of attorney or any other authority under which the proxy form is signed (or a duly certified copy of
such power or authority) must be included with the proxy form. If you have not received a proxy form and believe that you should have
one, or if you require additional proxy forms, please contact Computershare Investor Services PLC, The Pavilions, Bridgwater Road,
Bristol BS99 6ZY (Telephone: 0370 703 0013).
6. CREST members who wish to appoint a proxy or proxies by utilising the CREST electronic proxy appointment service may do so for the
meeting and any adjournment(s) of it by using the procedures described in the CREST manual (available via www.euroclear.com). CREST
personal members or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s),
should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. In order
for a proxy appointment made using the CREST service to be valid, the appropriate CREST message (a ‘CREST Proxy Instruction’) must be
properly authenticated in accordance with Euroclear UK & International Limited’s (EUI) specifications and must contain the information
required for such instructions, as described in the CREST Manual. The message, regardless of whether it constitutes the appointment of
a proxy or is an amendment to the instruction given to a previously appointed proxy, must, in order to be valid, be transmitted so as to be
received by Computershare Investor Services PLC (ID 3RA50) no later than 4.00 p.m. on 10 December 2021 or, in the event of an
adjournment of the meeting, 48 hours before the adjourned meeting. For this purpose, the time of receipt will be taken to be the time (as
determined by the timestamp applied to the message by the CREST applications host) from which the issuer’s agent is able to retrieve the
message by enquiry to CREST in the manner prescribed by CREST. After this time, any change of instructions to proxies appointed through
CREST should be communicated to the appointee through other means. CREST members and, where applicable, their CREST sponsors
or voting service providers should note that EUI does not make available special procedures in CREST for any particular message. Normal
system timings and limitations will therefore apply in relation to the input of CREST proxy instructions. It is the responsibility of the CREST
member concerned to take (or, if the CREST member is a CREST personal member or sponsored member, or has appointed a voting
service provider(s), to procure that his/her CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure
that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where
applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST manual concerning
practical limitations of the CREST system and timings. The Company may treat as invalid a CREST proxy instruction in the circumstances
set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001.
7. Proxymity Voting – if you are an institutional investor you may also be able to appoint a proxy electronically via the Proxymity platform,
a process which has been agreed by the Company and approved by the Registrar. For further information regarding Proxymity, please go
to www.proxymity.io. Your proxy must be lodged by 4.00 p.m. on 10 December 2021 in order to be considered valid. Before you can
appoint a proxy via this process you will need to have agreed to Proxymity’s associated terms and conditions. It is important that you read
these carefully as you will be bound by them and they will govern the electronic appointment of your proxy.
8. A corporation which is a shareholder can appoint one or more corporate representatives who may exercise, on its behalf, all its powers
as a member provided that no more than one corporate representative exercises powers over the same share.
9. As at 6.00 p.m. on 19 October 2021, the Company’s issued share capital comprised 620,237,346 Ordinary Shares of £0.01 each. Each
Ordinary Share carries the right to one vote at a General Meeting of the Company and, therefore, the total number of voting rights in the
Company as at 6.00 p.m. on 19 October 2021 is 620,237,346. The website referred to in Note 2 will include information on the number
of shares and voting rights.
10. Under section 319A of the Act, any member attending the meeting has a right to ask questions. The Company must answer any question
you ask relating to the business being dealt with at the meeting unless: (a) answering the question would interfere unduly with the
preparation for the meeting or involve the disclosure of confidential information; (b) the answer has already been given on a website in the
form of an answer to a question; or (c) it is undesirable in the interests of the Company or the good order of the meeting that the question
be answered.
88
Target Healthcare REIT plc
11. Under section 338 of the Act, a member or members meeting the qualification criteria set out in Note 14 below may, subject to certain
conditions, require the Company to circulate to members notice of a resolution which may properly be moved and is intended to be
moved at that meeting. The conditions are that: (a) the resolution must not, if passed, be ineffective (whether by reason of inconsistency
with any enactment or the Company’s constitution or otherwise); (b) the resolution must not be defamatory of any person, frivolous or
vexatious; and (c) the request: (i) may be in hard copy form or in electronic form; (ii) must identify the resolution of which notice is to be
given by either setting out the resolution in full or, if supporting a resolution sent by another member, clearly identifying the resolution
which is being supported; (iii) must be authenticated by the person or persons making it; and (iv) must be received by the Company not
later than six weeks before the meeting to which the request relates.
12. Under section 338A of the Act 2006, a member or members meeting the qualification criteria set out at Note 14 below may require the
Company to include in the business to be dealt with at the Annual General Meeting a matter (other than a proposed resolution) which
may properly be included in the business (a matter of business). The request must have been received by the Company not later than
2 November 2021. The conditions are that the matter of business must not be defamatory of any person, frivolous or vexatious. The
request must identify the matter of business by either setting it out in full or, if supporting a statement sent by another member, clearly
identify the matter of business which is being supported. The request must be accompanied by a statement setting out the grounds for
the request. Members seeking to do this should write to the Company providing their full name and address.
13. Under section 527 of the Act, a member or members meeting the qualification criteria set out at Note 14 below may have the right to
request the Company to publish on its website a statement setting out any matter that such members propose to raise at the meeting
relating to the audit of the Company’s accounts (including the Auditor’s Report and the conduct of the audit) that are to be laid before the
meeting. Where the Company is required to publish such a statement on its website: (a) it may not require the shareholders making the
request to pay any expenses incurred by the Company in complying with the request; (b) it must forward the statement to the Company’s
auditors no later than the time the statement is made available on the Company’s website; and (c) the statement may be dealt with as part
of the business of the meeting. The request must: (a) be in writing to Target Fund Managers Limited at Laurel House, Laurelhill Business
Park, Stirling FK7 9JQ; (b) either set out the statement in full or, if supporting a statement sent by another shareholder, clearly identify the
statement which is being supported; (c) be authenticated by the person or persons making it; and (d) be received by the Company at least
one week before the meeting.
14. In order to be able to exercise the members’ rights in Notes 11 to 13, the relevant request must be made by: (a) a member or members
having a right to vote at the meeting and holding at least 5% of total voting rights of the Company; or (b) at least 100 members having a
right to vote at the meeting and holding, on average, at least £100 of paid-up share capital.
15. If you are a person who has been nominated under section 146 of the Companies Act 2006 to enjoy information rights (Nominated
Person), you may have a right under an agreement between you and the shareholder of the Company who has nominated you to have
information rights (Relevant Shareholder) to be appointed or to have someone else appointed as a proxy for the meeting. If you either do
not have such a right or if you have such a right but do not wish to exercise it, you may have a right under an agreement between you and
the Relevant Shareholder to give instructions to the Relevant Shareholder as to the exercise of voting rights. Your main point of contact in
terms of your investment in the Company remains the Relevant Shareholder (or, perhaps, your custodian or broker) and you should
continue to contact them (and not the Company) regarding any changes or queries relating to your personal details and your interest in
the Company (including any administrative matters). The only exception to this is where the Company expressly requests a response from
you. The statement of the rights of members in relation to the appointment of proxies in Notes 3 and 4 on page 88 does not apply to a
Nominated Person.
16. Any person holding 3% 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 comply with their respective disclosure obligations under the UK Disclosure
Guidance and Transparency Rules.
17. Copies of the Directors’ letters of appointment are available for inspection at the Company’s registered office during normal business hours
and at the place of the meeting from at least 15 minutes prior to the meeting until the end of the meeting.
18. If law or Government guidance so requires at the time of the meeting, the Chairman of the Meeting will limit, in his sole discretion, and in
accordance with the provisions of the Articles of Association, the number of individuals in attendance at the meeting.
Annual Report and Financial Statements 2021
89
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Shareholder Information
Tax Summary for Real Estate Investment Trusts
Target Healthcare REIT plc is tax resident in the UK and is a Real Estate Investment Trust (REIT) under Part 12 of the Corporation Tax Act 2010,
subject to continuing compliance with the REIT rules and regulations. The main REIT rules with which the Group must comply in order to
retain its REIT status are as follows:
– at the start of each accounting period, the assets of the tax-exempt business must be at least 75% of the total value of the Group’s assets;
– at least 75% of the Group’s total profits must arise from the tax-exempt business;
– at least 90% of the tax-exempt rental business profits must be distributed in the form of a Property Income Distribution; and
– the Group must hold a minimum of three properties with no single property exceeding 40% of the portfolio value.
A REIT does not suffer UK corporation tax on the profits (income and capital gains) derived from its qualifying property rental businesses in the
UK and elsewhere (the ‘Tax-Exempt Business’), provided that certain conditions are satisfied. Instead, distributions in respect of the Tax-Exempt
Business will be treated for UK tax purposes as UK property income in the hands of shareholders (see further below for details on the UK tax
treatment of shareholders in a REIT). A dividend paid by the Company relating to profits or gains of the Tax-Exempt Business is referred to in
this section as a Property Income Distribution (‘PID’).
UK corporation tax remains payable in the normal way in respect of income and gains from the Company’s business (generally including any
property trading business) not included in the Tax-Exempt Business (the ‘Residual Business’). Dividends relating to the Residual Business are
treated for UK tax purposes as normal dividends. Any normal dividend paid by the Company is referred to as a Non-PID Dividend (‘Non-PID’).
A REIT may become subject to an additional corporation tax charge if it pays a distribution to corporate shareholders that hold 10 per cent or
more of share capital or voting rights and/or are entitled to 10 per cent or more of distributions. This tax charge will not be incurred if the REIT
has taken reasonable steps to avoid making distributions to such a shareholder in line with HMRC guidance.
UK Taxation of PIDs
A PID is, together with any property income distribution from any other REIT company, treated as taxable income from a single UK property
business. The basic rate of income tax (currently 20%) will be withheld by the Company (where required) on the PID unless the shareholder
is entitled to receive PIDs without income tax being deducted at source and they have notified the Company’s registrar of this entitlement
sufficiently in advance of a PID being paid and the Company is satisfied that the shareholder concerned is entitled to that treatment.
Shareholders entitled to elect to receive distributions without deduction for withholding tax may complete the declaration form which is
available on request from the Company through the contact details provided on its website, www.targethealthcarereit.co.uk, or from the
Company’s registrar. Shareholders who qualify for gross payments are, principally, UK resident companies, certain UK public bodies, UK
charities, UK pension schemes and the managers of ISAs, PEPs and Child Trust Funds, in each case subject to certain conditions. Individuals
and non-UK residents do not qualify for gross payments of distributions and should not complete the declaration form.
Shareholders who are individuals may, depending on their particular circumstances, either be liable to further UK income tax on their PID at
their applicable marginal income tax rate, incur no further UK tax liability on their PID, or be entitled to claim repayment of some or all of the
UK income tax withheld on their PID. The £1,000 property income allowance does not apply to PIDs.
Corporate shareholders who are within the charge to UK corporation tax will generally be liable to pay corporation tax on their PID and, if
income tax is withheld at source, the tax withheld can be set against the company’s liability to UK corporation tax or against any income tax
which it is required to withhold in the accounting period in which the PID is received.
UK Taxation of Non-PIDs
Under current UK legislation, most individual shareholders who are resident in the UK for taxation purposes receive a tax-free dividend
allowance of £2,000 per annum and any dividend income (including Non-PIDs) in excess of this allowance is subject to income tax.
UK resident corporate shareholders (other than dealers and certain insurance companies) are not liable to corporation tax or income tax in
respect of dividends provided that the dividends are exempt under Part 9A of the Corporation Tax Act 2009.
UK Taxation of Chargeable Gains in Respect of Ordinary Shares in the Company
Any gain on disposal (by sale, transfer, redemption or otherwise) of the Company’s ordinary shares by shareholders resident in the UK for
taxation purposes will be subject to capital gains tax in the case of an individual shareholder, or UK corporation tax on chargeable gains in
the case of a corporate shareholder.
UK ISAs and SIPPS
It is expected that the Company’s shares will be eligible for inclusion in ISAs and Investment-Regulated Pension Schemes.
90
Target Healthcare REIT plc
The statements on taxation on pages 90 and 91 are intended to be a general summary of certain tax consequences that may arise in relation
to the Company and shareholders. This is not a comprehensive summary of all technical aspects of the taxation of the Company and its
shareholders and is not intended to constitute legal or tax advice to investors.
The statements relate to the UK tax implications of a UK resident individual investing in the Company (unless expressly stated otherwise). The
statements relate to investors acquiring the Company’s ordinary shares for investment purposes only, and not for the purposes of any trade.
The tax consequences for each investor of investing in the Company may depend upon the investor’s own tax position and upon the relevant
laws of any jurisdiction to which the investor is subject. The statements are based on current tax legislation and HMRC practice, both of which
are subject to change at any time, possibly with retrospective effect, and there can be no guarantee that the tax position or proposed tax
position prevailing at the time an investment in the Company is made will endure indefinitely.
Prospective investors should familiarise themselves with, and where appropriate should consult their own professional advisers on, the overall
tax consequences of investing in the Company.
Historical Distributions
Distributions to shareholders may potentially include both PID and Non-PID Dividends as calculated in accordance with specific attribution
rules. The Company provides shareholders with a certificate setting out how much of their dividend is a PID and how much, if any, is a Non-PID.
A breakdown of the dividends paid in relation to the previous five financial years is set out below and details of all the dividends paid since the
Group’s launch are available at www.targethealthcarereit.co.uk
Distribution
Ex-dividend date
Payment date
PID
(pence per share)
Non-PID
(pence per share)
Total distribution
(pence per share)
In relation to the year ended 30 June 2021
Fourth interim dividend
Third interim dividend
Second interim dividend
First interim dividend
12/08/21
13/05/21
11/02/21
12/11/20
Total
In relation to the year ended 30 June 2020
Fourth interim dividend
Third interim dividend
Second interim dividend
First interim dividend
13/08/20
07/05/20
13/02/20
14/11/19
Total
In relation to the year ended 30 June 2019*
18/07/19
Fourth interim dividend
02/05/19
Third interim dividend
07/02/19
Second interim dividend
25/10/18
First interim dividend
Total
In relation to the year ended 30 June 2018*
09/08/18
Fourth interim dividend
03/05/18
Third interim dividend
01/02/18
Second interim dividend
16/11/17
First interim dividend
Total
In relation to the year ended 30 June 2017*
03/08/17
Fourth interim dividend
04/05/17
Third interim dividend
02/02/17
Second interim dividend
03/11/16
First interim dividend
Total
27/08/21
28/05/21
26/02/21
27/11/20
28/08/20
29/05/20
28/02/20
29/11/19
02/08/19
31/05/19
22/02/19
30/11/18
31/08/18
25/05/18
23/02/18
30/11/17
25/08/17
26/05/17
24/02/17
25/11/16
0.16800
1.68000
1.68000
1.68000
5.20800
0.08350
1.67000
1.67000
1.67000
5.09350
–
1.64475
1.64475
1.64475
4.93425
1.12870
1.61250
1.61250
1.61250
5.96620
0.70700
1.09900
1.25600
1.25600
4.31800
1.51200
–
–
–
1.51200
1.58650
–
–
–
1.58650
1.64475
–
–
–
1.64475
0.48380
–
–
–
0.48380
0.86300
0.47100
0.31400
0.31400
1.96200
1.68000
1.68000
1.68000
1.68000
6.72000
1.67000
1.67000
1.67000
1.67000
6.68000
1.64475
1.64475
1.64475
1.64475
6.57900
1.61250
1.61250
1.61250
1.61250
6.45000
1.57000
1.57000
1.57000
1.57000
6.28000
* Note: Distributions paid up until the year ended 30 June 2019, inclusive, were paid by the previous parent company of the Group, Target Healthcare REIT Limited, which
was a Jersey-registered company and in relation to which the tax consequences set out on pages 90 to 91 may differ.
Annual Report and Financial Statements 2021
91
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Shareholder Information continued
Historical Record
Assets
At 30 June
Total assets (£’000)
Market value of property
portfolio (£’000)
Shareholders’ funds (£’000)
Performance
At 30 June
EPRA NTA per share
Share price
Premium
IFRS EPS
Adjusted EPRA EPS
Dividends per share
Ongoing charges
Contact Information
2014
2015
2016
2017
2018
2019
2020
2021
105,071
176,310
282,791
306,246
434,822
538,379
663,772
718,394
83,246
90,218
143,748
139,292
210,666
253,282
281,951
256,937
385,542
358,607
500,884
413,089
617,584
494,113
684,845
565,185
2014
94.7p
104.8p
10.6%
1.08p
4.41p
6.00p
1.95%
2015
97.9p
106.9p
9.2%
8.02p
6.10p
6.12p
1.58%
2016
100.6p
109.0p
8.3%
6.81p
5.25p
6.18p
1.42%
2017
101.9p
117.8p
15.6%
7.58p
5.23p
6.28p
1.48%
2018
105.7p
110.5p
4.5%
9.77p
5.54p
6.45p
1.48%
2019
107.5p
115.6p
7.5%
8.10p
5.45p
6.58p
1.52%
2020
108.1p
110.0p
1.8%
7.18p
5.27p
6.68p
1.51%
2021
110.4p
115.4p
4.5%
9.23p
5.46p
6.72p
1.55%
Investor relations
Information on Target Healthcare REIT plc can be found on its website at www.targethealthcarereit.co.uk including details on the
Company’s share price history, historical dividends and regulatory reports, including the Group’s Annual Reports, Interim Reports and
Quarterly Investor Reports.
Registrar:
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
T: +44 (0)370 702 0000
E: www.investorcentre.co.uk/contactus
Enquiries about the following administrative matters should be addressed to the Company’s registrar:
– Change of address notification.
– Lost share certificates.
– Dividend payment enquiries.
– Dividend mandate instructions. Shareholders may have their dividends paid directly into their bank or building society accounts by
completing a dividend mandate form. Dividend confirmations, where applicable, are sent directly to shareholders’ registered addresses.
– Amalgamation of shareholdings. Shareholders who receive more than one copy of the Annual Report are invited to amalgamate their
accounts on the share register.
Shareholders can view and manage their shareholdings online at www.investorcentre.co.uk, including updating address records, making dividend
payment enquiries, updating dividend mandates, viewing any outstanding payments and viewing the latest share price. Shareholders will need
their Shareholder Reference Number, which can be found on their share certificate or a recent dividend confirmation, to access this site.
Warning to shareholders – Boiler Room Scams
Fraudsters use persuasive and high-pressure tactics to lure investors into scams. They may offer to sell shares that turn out to be
worthless or non-existent, or to buy shares at an inflated price in return for an upfront payment.
If you receive unsolicited investment advice or requests:
– Check the Financial Services Register from www.fca.org.uk to see if the person or firm contacting you is authorised by the Financial
Conduct Authority (‘FCA’)
– Call the FCA on 0800 111 6768 if the firm does not have contact details on the Register or you are told they are out of date
– Check the list of unauthorised firms to avoid at www.fca.org.uk/scams
– Consider that if you buy or sell shares from an unauthorised firm you will not have access to the Financial Ombudsman Service or
Financial Services Compensation Scheme
– Think about getting independent financial and professional advice
If you are approached by fraudsters please tell the FCA by using the share fraud reporting form at www.fca.org.uk/scams where you can
find out more about investment scams. You can also call the FCA Consumer Helpline on 0800 111 6768. If you have already paid money
to share fraudsters you should contact Action Fraud on 0300 123 2040 or via their website at www.actionfraud.police.uk.
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Target Healthcare REIT plc
Alternative Performance Measures
The Company uses Alternative Performance Measures (‘APMs’). APMs do not have a standard meaning prescribed by GAAP and therefore may
not be comparable to similar measures presented by other entities. The definitions of all APMs used by the Company are highlighted in the
glossary on pages 97 to 99, with detailed calculations, including reconciliation to the IFRS figures where appropriate, being set out below and
within the EPRA Performance Measures.
Discount or Premium – the share price of an Investment Company is derived from buyers and sellers trading their shares on the stock market.
This price is not identical to the NAV. If the share price is lower than the NAV per share, the shares are trading at a discount and, if the share
price is higher than the NAV per share, are said to be at a premium. The figure is calculated at a point in time and, unless stated otherwise,
the Company measures its discount or premium relative to the EPRA NTA per share.
EPRA Net Tangible Assets per share (see page 67)
Share price
Premium
(a)
(b)
= (b-a)/a
2021
pence
110.4
115.4
4.5%
2020
pence
108.1
110.0
1.8%
Dividend Cover – the percentage by which Group specific adjusted EPRA earnings for the year cover the dividend paid.
Group-specific EPRA earnings for the year (see page 66)
First interim dividend
Second interim dividend
Third interim dividend
Fourth interim dividend
Dividends paid in relation to the year
Dividend cover
2021
£’000
2020
£’000
(a)
25,955
23,224
7,686
7,686
8,594
8,594
32,560
80%
7,640
7,640
7,640
7,640
30,560
76%
(b)
= (a/b)
Ongoing Charges – 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, non-recurring costs and the costs of buying
back or issuing ordinary shares.
Investment management fee
Other expenses
Less movement in impairment for credit losses and bad debts written off
Less direct property costs and other non-recurring items
Adjustment to management fee arrangements and irrecoverable VAT*
Total
Average net assets
Ongoing charges
2021
£’000
5,796
5,334
(2,717)
(263)
49
8,199
2020
£’000
5,264
4,261
(2,171)
(138)
259
7,475
528,035
493,691
(a)
(b)
= (a/b)
1.55%
1.51%
* Based on the Group’s net asset value at 30 June 2021, the management fee is expected to be paid at a weighted average rate of 1.04% (2020: 1.05%) of the Group’s
average net asset plus an effective irrecoverable VAT rate of approximately 7%. The management fee has therefore been amended so that the Ongoing Charges figure
includes the expected all-in management fee rate of 1.11% (2020: 1.12%).
Total Return – 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.
Value at start of year
Value at end of year
Change in value during the year (b-a)
Dividends paid
Additional impact of dividend reinvestment
Total gain in year (c+d+e)
Total return for the year
EPRA NTA
(pence)
108.1
110.4
2.3
6.7
0.5
9.5
(a)
(b)
(c)
(d)
(e)
(f)
2021
IFRS NAV
(pence)
108.0
110.5
2.5
6.7
0.4
9.6
= (f/a)
8.8%
8.9%
Share price
(pence)
EPRA NTA
(pence)
110.0
115.4
5.4
6.7
0.3
12.4
11.3%
107.5
108.1
0.6
6.7
0.2
7.5
7.0%
2020
IFRS NAV
(pence)
107.3
108.0
0.7
6.7
0.3
7.7
Share price
(pence)
115.6
110.0
(5.6)
6.7
–
1.1
7.2%
0.9%
Annual Report and Financial Statements 2021
93
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information
EPRA Performance Measures
The European Public Real Estate Association is the industry body representing listed companies in the real estate sector. EPRA publishes Best
Practice Recommendations (‘BPR’) to establish consistent reporting by European property companies. Further information on the EPRA BPR
can be found at www.epra.com.
The figures below are calculated and presented in line with the BPR Guidelines published by EPRA in October 2019, applicable for accounting
periods commencing after 1 January 2020.
EPRA Net Reinstatement Value (£’000)
EPRA Net Tangible Assets (£’000)
EPRA Net Disposal Value (£’000)
EPRA Net Reinstatement Value per share (pence)
EPRA Net Tangible Assets per share (pence)
EPRA Net Disposal Value per share (pence)
EPRA Earnings (£’000)
Group specific adjusted EPRA earnings (£’000)
EPRA Earnings per share (pence)
Group specific adjusted EPRA earnings per share (pence)
EPRA Net Initial Yield
EPRA Topped-up Net Initial Yield
EPRA Vacancy Rate
EPRA Cost Ratio – including direct vacancy costs
EPRA Group specific adjusted Cost Ratio (including direct vacancy costs)
EPRA Cost Ratio – excluding direct vacancy costs
EPRA Group specific adjusted Cost Ratio (excluding direct vacancy costs)
Capital Expenditure (£’000)
Like-for-like Rental Growth
2021
2020
609,630
564,934
563,796
119.2
110.4
110.2
34,047
25,955
7.16
5.46
5.76%
5.83%
–
22.3%
26.6%
22.3%
26.6%
54,859
0.1%
535,256
494,340
492,602
117.0
108.1
107.7
30,468
23,224
6.92
5.27
5.69%
6.04%
–
21.5%
25.7%
21.5%
25.7%
118,743
1.5%
EPRA NAV metrics and EPRA Earnings
Full details of these calculations, including reconciliations of each to the IFRS measures, are detailed in note 8 to the Consolidated Financial
Statements on pages 66 and 67.
EPRA Net Initial Yield and EPRA Topped-up Net Initial Yield
EPRA Net Initial Yield is calculated as 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. The EPRA Topped-up
Net Initial Yield incorporates an adjustment in respect of the expiration of rent-free periods (or other unexpired lease incentives).
Annualised passing rental income based on cash rents
Notional rent expiration of rent-free periods or other lease incentives
Topped-up net annualised rent
Standing assets including properties held for sale (see pages 68 and 69)
Allowance for estimated purchasers’ costs
Grossed-up completed property portfolio valuation
EPRA Net Initial Yield
EPRA Topped-up Net Initial Yield
2021
£’000
40,763
450
41,213
662,495
44,696
707,191
5.76%
5.83%
2020
£’000
36,749
2,264
39,013
604,984
40,916
645,900
5.69%
6.04%
(a)
(b)
(c)
= (a/c)
= (b/c)
EPRA Vacancy Rate
EPRA Vacancy Rate is the estimated rental value (ERV) of vacant space (excluding forward fund developments and properties held for sale)
divided by the contractual rent of the investment property portfolio, expressed as a percentage.
Annualised potential rental value of vacant premises*
Annualised potential rental value of the property portfolio (including vacant properties)
EPRA Vacancy Rate
2021
£’000
–
41,213
–
2020
£’000
–
39,013
–
(a)
(b)
= (a/b)
* As detailed in note 20 to the Consolidated Financial Statements, there were no unoccupied properties at either 30 June 2021 or 30 June 2020.
94
Target Healthcare REIT plc
EPRA Cost Ratio
The EPRA cost ratios are produced using EPRA methodology, which aims to provide a consistent base-line from which companies can provide
additional information, and include all property expenses and management fees. Consistent with the Group specific adjusted EPRA earnings
detailed in note 8 to the Consolidated Financial Statements, similar adjustments have been made to also present the adjusted Cost Ratio
which is thought more appropriate for the Group’s business model.
Investment management fee
Other expenses
EPRA costs (including direct vacancy costs)
Specific cost adjustments, if applicable
Group specific adjusted EPRA costs (including direct vacancy costs)
Direct vacancy costs
Gross rental income per IFRS
Adjusted for rental income arising from recognising guaranteed rent review uplifts and lease
incentives
Adjusted for development interest under forward fund arrangements
Group specific adjusted gross rental income
EPRA Cost Ratio (including direct vacancy costs)
EPRA Group specific adjusted Cost Ratio (including direct vacancy costs)
EPRA Cost Ratio (excluding direct vacancy costs)
EPRA Group specific adjusted Cost Ratio (excluding direct vacancy costs)
(a)
(b)
(c)
(d)
(e)
= (a/d)
= (b/e)
= ((a-c)/d)
= ((b-c)/e)
Year ended
30 June 2021
£’000
Year ended
30 June 2020
£’000
5,796
5,334
11,130
–
11,130
–
5,264
4,261
9,525
–
9,525
–
49,980
44,267
(8,739)
647
41,888
22.3%
26.6%
22.3%
26.6%
(8,219)
975
37,023
21.5%
25.7%
21.5%
25.7%
Year ended
30 June 2021
£’000
Year ended
30 June 2020
£’000
34,808
20,032
19
54,859
(3,458)
51,401
108,024
9,245
1,474
118,743
(1,242)
117,501
Year ended
30 June 2021
£’000
Year ended
30 June 2020
£’000
(a)
39,013
32,193
686
(162)
(468)
56
2,582
(438)
2,200
41,213
0.1%
732
(56)
(199)
477
7,490
(1,147)
6,820
39,013
1.5%
(b)
(c)
= (a+c)
= (b/a)
EPRA Capital Expenditure
Acquisitions (including acquisition costs)
Forward fund developments
Like-for-like portfolio
Total capital expenditure
Conversion from accrual to cash basis
Total capital expenditure on a cash basis
Like-for-like Rental Growth
Opening contractual rent
Rent reviews
Movement in variable rental leases
Re-tenanting of properties*
Like-for-like rental growth
Acquisitions and developments
Disposals
Total movement
Closing contractual rent
Like-for-like rental growth*
* During the year ended 30 June 2021, as explained in more detail on page 17, the Group resolved its position with a tenant which had been operating two of the Group’s
homes. The re-tenanting of one of these homes was completed during the year resulting in a small uplift in rental income; however, this asset management activity has
resulted in a temporary reduction in contractual rent in relation to the other home, thereby reducing the reported like-for-like rental growth for the year by 1.2%. The
re-tenanting of the second home is expected to complete imminently.
Annual Report and Financial Statements 2021
95
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Data centre
As the age of the UK population increases along with the care needs of older people, there is a
clear requirement for investment that will modernise and grow the supply of fit-for-purpose care
homes. Much of the UK’s existing care home real estate is sub-standard for residents and their
care professionals.
Responsible investment, applying specialist knowledge to a complex and sensitive sector, can deliver stable, long-term returns and provide
positive social and community impact.
1. Demographics
• Number of >85s forecast to
double to 3.3m in next 25 years
• Forecast increase in people living
with dementia, to 1.0m in 2024
and 1.6m by 2040
• Societal shift means less elderly
care provided within families
PEOPLE AGED 64 AND OVER: TREND AND PROJECTIONS
24
20
16
12
8
4
2040
2x over 85s
Today
)
n
o
i
l
l
i
m
l
(
e
p
o
e
p
f
o
r
e
b
m
u
N
0
1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011 2021 2031 2041 2051 2061 2071 2081
65–74
75–84
85+
Sources: 1901–2001, Census data; Following 2001, successive principal national projections (the latest being
2018-based) from the Office for National Statistics and (formerly) the Government Actuary’s Department.
2. Real estate standards
SUPPLY AND DEMAND
465k
beds
395k
residents
Total supply
Total
demand
265k
shortage
130k
beds
Fit-for-
purpose
supply
TOTAL EN SUITE WET ROOM PROVISION
Proportion of the market is increasing as older
homes close and new homes are built
2021
2014
14%
28%
Sources:
Target Fund Managers/Carterwood Research.
SEVEN YEAR TOTAL RETURN VS STANDARD DEVIATION 2014-2020
%
)
m
u
n
n
a
r
e
p
(
n
r
u
t
e
R
l
a
t
o
T
15
10
5
0
Industrial
THRL Portfolio
Residential Index
Office
Primary
Healthcare
Healthcare
Gilts
All property
Retail
Equities
Real Estate Equities
0
< Reduced risk
5
Risk (standard deviation)
15
Increased risk >
20
Source: MSCI, based on annual index to 31 December 2020.
• Resident and family expectations
on accommodation quality are
increasing
• Only 28% of rooms in UK have
the en suite wet rooms which are
vital for hygiene, privacy & dignity
• Purpose-built homes offer
advantages for residents and care
providers, and better social space
for communities
3. Long-term
investment,
stable returns
• Lease structures are long-term
(typically 30-35 years) and
inflation-linked
• Portfolio track record of strong
returns and low volatility
(defensive, non-cyclical)
• Long-term capital appropriate for
vital UK social care infrastructure
96
Target Healthcare REIT plc
Glossary of Terms and Definitions
Corporate Terms
AIC
AIFMD
Closed-end Investment
Company
CQC
Depositary
Discount/Premium*
Dividend
Dividend Cover*
Dividend Yield*
EPRA Best Practice
EPRA Cost Ratio
EPRA Earnings per Share*
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.
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.
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 IQ EQ
Depositary Company (UK) Limited.
The amount by which the market price per share of a Closed-end Investment Company is lower or
higher than the net asset value per share. The detailed method of calculation is shown on page 93.
The income from an investment. The Company currently pays interim dividends to shareholders quarterly.
The absolute value of Group specific adjusted EPRA Earnings divided by the absolute value of dividends
relating to the period of calculation. The detailed method of calculation is shown on page 93.
The annual Dividend expressed as a percentage of the share price at the date of calculation.
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.
Reflects the relevant overhead and operating costs of the business. It is calculated by expressing the
sum of property expenses (net of service charge recoveries and third-party asset management fees)
and administration expenses (excluding exceptional items) as a percentage of gross rental income.
The detailed method of calculation is shown on page 95.
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. A reconciliation of the earnings per IFRS and the EPRA earnings,
including any items specific to the Group, is contained in note 8 to the Consolidated Financial Statements.
EPRA Group specific adjusted
Cost Ratio*
The EPRA Cost Ratio adjusted for items thought appropriate for the Group’s specific business model.
The adjustments made are consistent with those made to the Group specific adjusted EPRA earnings
as detailed in note 8 to the Consolidated Financial Statements.
EPRA Net Disposal Value (‘NDV’)* A measure of Net Asset Value which represents the shareholders’ value under a disposal scenario, where
deferred tax, financial instruments and certain other adjustments are calculated to the full extent of their
liability, net of any resulting tax. A reconciliation of the NAV per IFRS and the EPRA NDV is contained in note
8 to the Consolidated Financial Statements.
EPRA Net Initial Yield*
EPRA Net Reinstatement Value
(‘NRV’)*
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. The detailed method of calculation is shown on page 94.
A measure of Net Asset Value which assumes that entities never sell assets and aims to represent the value
required to rebuild the entity. The objective is to highlight the value of net assets on a long-term basis.
Assets and liabilities that are not expected to crystallise in normal circumstances, such as the fair value
movements on financial derivatives, are excluded and the costs of recreating the Group through
investment markets, such as property acquisition costs and taxes, are included. A reconciliation of the NAV
per IFRS and the EPRA NRV is contained in note 8 to the Consolidated Financial Statements.
EPRA Net Tangible Assets (‘NTA’)* A measure of Net Asset Value which assumes that entities buy and sell assets, thereby crystallising
certain levels of unavoidable deferred tax. A reconciliation of the NAV per IFRS and the EPRA NTA is
contained in note 8 to the Consolidated Financial Statements.
EPRA Topped-up Net Initial
Yield*
Incorporates an adjustment to the EPRA Net Initial Yield in respect of the expiration of rent-free periods
(or other unexpired lease incentives). The detailed method of calculation is shown on page 94.
* Alternative Performance Measure
Annual Report and Financial Statements 2021
97
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information Glossary of Terms and Definitions continued
GAAP
Gearing
Investment Manager
Leverage
Loan-to-Value*
Market Capitalisation
MSCI
Generally Accepted Accounting Practice. This includes UK GAAP and International GAAP (IFRS or
International Financial Reporting Standards). The Group’s Consolidated 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 gross gearing figure is
calculated as debt divided by the market value of the properties held. The net gearing figures is
calculated as debt less cash divided by the market value of the properties held.
The Company’s Investment Manager is Target Fund Managers Limited. Further details are set out on
page 28 and in note 2 to the Consolidated Financial Statements.
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 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.
A measure of the Group’s Gearing level. Gross LTV is calculated as total gross debt as a proportion of gross
property value. Net LTV is calculated as total gross debt less cash as a proportion of gross property value.
The stock market value of the Company as determined by multiplying the number of Ordinary Shares
in issue, excluding any shares held in treasury, by the Share Price of the Ordinary Shares.
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.
NAV per Ordinary Share
This is calculated as the Net Asset Value (NAV) divided by the number of shares in issue.
Net Asset Value (or Shareholders’
Funds)
The value of total assets less liabilities. Liabilities for this purpose include current and long-term liabilities.
It represents the underlying value of an Investment Company at a point in time.
Ongoing Charges Ratio*
Ordinary Shares
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, non-recurring costs and the costs of buying back or issuing ordinary shares. The detailed
method of calculation is shown on page 93.
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. The Company has only Ordinary Shares in issue.
Real Estate Investment Trust
(or REIT)
A tax regime which in the UK exempts participants from corporation tax both on UK rental income
and gains arising on UK investment property sales, subject to certain requirements. Further details
are provided on pages 90 and 91.
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. The detailed method of calculation is shown on page 93.
* Alternative Performance Measure
98
Target Healthcare REIT plc
Property Terms
Break Option
Contractual Rent
A clause in a lease which provides the landlord or tenant with an ability to terminate the lease before
its contractual expiry date.
The annual rental income receivable on a property as at the balance sheet date, adjusted for the
inclusion of rent currently subject to a rent free period.
Covenant Strength
This refers to the quality of a tenant’s financial status and its ability to perform the covenants in the lease.
EBITDA lease
Lease arrangement which constitutes a fixed base rental amount plus variable top up rental payments
based on the trading Estimated Rental Value performance of the underlying property.
Estimated Rental Value (‘ERV’)
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.
Fixed and Minimum Guaranteed
Rental Uplifts
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 Fund/Commitment
Lease
Lease Incentive
Lease Renewal
Mature Homes
Occupancy Rate
A contract pertaining to the future purchase of a property. Forward Funding relates to the acquisition of
a property which hasn’t yet been built, with the Group providing the developer with the funding for the
development, usually in staged payments throughout the contract.
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.
Care homes which have been in operation for more than three years. There were 51 homes in the
Group’s portfolio which met this definition for the entire duration of the year ended 30 June 2021,
closing at 58 homes on 30 June 2021.
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.
Portfolio or Passing Rent*
The annual rental income currently receivable on a property as at the balance sheet date, excluding rental
income where a rent-free period is in operation. The gross rent payable by a tenant at a point in time.
Rent Cover*
Rent Review
Valuer
WAULT*
* Alternative Performance Measure
A measure of the tenant’s ability to meet its rental liability from the profit generated by their underlying
operations. Generally calculated as the tenant’s EBITDARM (earnings before interest, taxes, depreciation,
amortisation, rent and management fees) divided by the contracted rent. Unless otherwise stated, rent
cover is calculated based on Mature Homes only on a rolling twelve-month basis.
A periodic review of rent during the term of a lease, as provided for within a lease agreement.
An independent external valuer of a property. The Group’s Valuer is Colliers International Healthcare
Property Consultants Limited and detailed information regarding the valuation of the Group’s properties
is included in note 9 to the Consolidated Financial Statements.
Weighted average unexpired lease term. The average lease term remaining to expiry across the portfolio
weighted by contracted rental income.
Annual Report and Financial Statements 2021
99
Strategic ReportCorporate GovernanceFinancial StatementsAdditional Information 100
Target Healthcare REIT plc
Corporate Information
Directors
Registered office
AIFM and Investment Manager,
Company Secretary and Administrator
Legal Adviser
Broker
Valuers
Auditors
Tax Adviser
Depositary
Registrars
Malcolm Naish (Chairman)
June Andrews OBE
Gordon C Coull*
Alison Fyfe
Thomas J Hutchison III**
Vince Niblett
Level 13 Broadgate Tower
20 Primrose Street
London EC2A 2EW
Target Fund Managers Limited
Laurel House
Laurelhill Business Park
Stirling FK7 9JQ
Dickson Minto W.S.
Broadgate Tower
20 Primrose Street
London EC2A 2EW
Stifel Nicolaus Europe Limited
150 Cheapside
London EC2V 6ET
Colliers International Healthcare Property Consultants Limited
50 George Street
London W1U 7GA
Ernst & Young LLP
Atria One
144 Morrison Street
Edinburgh EH3 8EX
Deloitte LLP
Athene Place
66 Shoe Lane
London EC4A 3BQ
IQ EQ Depositary Company (UK) Limited
Two London Bridge
London SE1 9RA
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS13 8AE
Website
www.targethealthcarereit.co.uk
* Chairman of Audit Committee
** Senior Independent Director
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Target Healthcare REIT plc
Level 13 Broadgate Tower
20 Primrose Street
London EC2A 2EW
www.targethealthcarereit.co.uk