Target Healthcare REIT plc Annual Report and Financial Statements 2022
Target Healthcare REIT plc Annual Report and Financial Statements 2022
Target Healthcare REIT plc
Annual Report and Financial Statements 2022
Investing
in care.
Delivering
returns.
About Us
Responsible investment
with a clear purpose –
improving the UK’s
care home real estate
Long-term sustainable value
– Compelling investment rationale, strongly supported by real
estate trends and demographic change.
– Long leases with inflation-linked rental growth; strong balance
sheet with substantially fixed-rate, long duration debt.
Key financial metrics for the year to, or as at, 30 June 2022
1 Based on EPRA NTA movement and dividends paid, see the alternative performance measures on page 95.
2 Based on adjusted EPRA earnings, see note 8 to the consolidated financial statements and the alternative performance measures on page 95.
EPRA NTA per share (pence)
112.3 +1.7%
108.1
110.4
112.3
2020
2021
2022
IFRS profit (£ million)
49.1 +11.8%
31.6
43.9
49.1
2020
2021
2022
Accounting total return (per cent)
1
8.1
7.0
8.8
8.1
2020
2021
2022
Dividend cover (per cent)
2
72
76
80
72
2020
2021
2022
Dividend per share (pence)
6.76 +0.6%
6.68
6.72
6.76
2020
2021
2022
Portfolio value (£ million)
911.6 +33.1%
617.6
684.8
911.6
2020
2021
2022
1Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
1
Strategic Report IFC-27
About Us IFC
Chairman’s Statement 4
Business Model 6
At a Glance 8
Environmental, Social and Governance 10
Investment Manager’s Report 14
Our Strategy 16
Principal and Emerging Risks and Risk Management 24
Section 172 Statement 26
Corporate Governance 28-57
Board of Directors 28
Investment Manager 30
Directors’ Report 32
Statement of Directors’ Responsibilities 39
Corporate Governance Statement 40
Report of the Audit Committee 44
Directors’ Remuneration Report 49
Independent Auditor’s Report 52
Financial Statements 58-88
Consolidated Statement of Comprehensive Income 58
Consolidated Statement of Financial Position 59
Consolidated Statement of Changes in Equity 60
Consolidated Statement of Cash Flows 61
Notes to the Consolidated Financial Statements 62
Company Statement of Financial Position 79
Company Statement of Changes in Equity 80
Notes to the Company Financial Statements 81
Additional Information 89-IBC
Notice of Annual General Meeting 89
Shareholder Information 92
Alternative Performance Measures 95
EPRA Performance Measures 96
Data Centre 98
Glossary of Terms and Definitions 99
Corporate Information 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.
2 Target Healthcare REIT plc
About Us continued
Social impact
driven strategy,
with a future-proofed
business model
Now
Standard-setting care home real estate.
100%
purpose-built
96%
wet-rooms
92%
A or B EPC ratings
100%
C or better
– Strong investment demand.
– Long leases with annual growth.
– Lowly geared balance sheet with
substantially fixed-rate debt.
– Track record of stable NAV returns.
Near-future trends
Clear movement to these standards
from the many older, converted
properties.
% UK care home market with wet-rooms
Minimum Energy Efficiency Standards
(MEES) legislation has applied to
commercial rented buildings since 2018.
COP 26 commitments made by the UK
Government anticipates the current “E”
rating requirement will be raised to “B”
for 2030.
Many commercial real estate owners
with older/converted properties
face a significant burden to meet the
forthcoming changes.
– Sector occupancy recovering
post COVID-19 pandemic.
– Long-term structural support
for care home places from
demographic change:
– Number of over 85s forecast
to almost double from 1.7m to
3.3m by 2046.
– 1 in 7 people over 85 will require
residential care.
29%
14%
2014 2022
Portfolio protected
from the sector’s
modernisation
challenge
Care home sector-
leading environmental
credentials
Long-term outlook and
commitment, aligned
with care sector needs
and supported by
demographic trends
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Why wet-rooms matter
1. Wet-rooms represent socially
acceptable standards
It is estimated that 50% of care home residents
experience incontinence. We believe all residents
should have en suite wet-rooms to allow personal
hygiene to be practised with dignity and in privacy.
We use the provision of wet-rooms as a proxy for
the overall standard of care home real estate.
The majority of care home places in the UK (71%)
do not offer this, instead “en suites” are generally
WC and wash hand basin and therefore require
residents to use shared washing facilities, while
many do not offer private hygiene facilities at all.
2. Wet-rooms support sustainable
occupancy levels
The sector is recognising the need to modernise its real estate,
with wet-room provision now at 29% having progressed from
14% only eight years ago. There is a clear commercial benefit
with respect to demand for care places:
– The current generation requiring care are more used to
showering than previous generations;
– En suite showers in hotels and other modern buildings
have become commonplace and substandard facilities
won’t be accepted;
– Modern buildings command a fee premium: homes built
since 2016 command 18%-28% higher fees than those from
older properties; and
– Provision future-proofs against potential legislative change
to mandate private washing facilities (retrofitting is costly and
will not always be possible).
Of course, it’s not just wet-rooms. Our portfolio of modern
homes also offer:
– More space per resident, both private and social;
– More useable outdoor space (balconies and gardens);
– Better accessibility via wider corridors and more lifts;
– Visitor space (e.g. dining rooms to host visitors/
local community);
– Cinemas, exercise space, activities rooms; and
– Better facilities for staff.
1 Carterwood Research – 2022.
18%-28%
higher resident fees in care homes built
since 2016
1
4 Target Healthcare REIT plc
1. Reflections
Despite the persistent COVID-19 impact
faced by UK care homes this past year,
our portfolio remains well-placed. Resident
occupancies are improving (mature home
occupancy now at 83% from 73% at its
lowest point in early 2021) and home
environments are returning to “normal”
trading and activity conditions. The quality
of our real estate, and the level of demand
for it in the UK care home investment
market, has driven a healthy and consistent
accounting total return of 8.1%, with
valuation increases reflecting our inflation-
linked leases and positive sentiment as to
future trading conditions.
Our rent collection for the year was 95%,
inclusive of successful arrears recovery post
year-end. We have collected 95% of rent
since the start of the COVID-19 pandemic
in March 2020. We remain confident our
portfolio will deliver sustainable value over
the long-term.
The start of the year brought shareholder
support for our capital raise to fund the
acquisition of a portfolio of 18 homes.
We were delighted to secure this in what
was a competitive bidding process, with the
mature trading histories complementing our
many newer homes. Following the disposal
of one non-core asset post-year-end, the
integration of the portfolio is complete with
performance in line with expectations on
acquisition and we look forward to many
years of stable income returns.
Late 2021 optimism was tempered early
in 2022 with the emergence of the
COVID-19 Omicron variant. This slowed
trading recovery across the portfolio as
the frequency of embargoes on admissions
increased once more. A small number of
tenants most exposed to newly opened/
immature homes were significantly
impacted. We have resolved an arrears
position with one tenant who represented
6.8% of contracted rent and have initiatives
in progress on the remaining affected assets,
giving visibility on rent collection improving
towards pre-pandemic norms.
2. Outlook
Other headwinds have emerged in 2022
which are potentially more long-lasting
and impactful, though we feel our business
model and strategy provides insulation.
Matters of concern include: energy and
EPRA NTA per share growth
1.7%
Dividend cover
72%
-8ppts
Dear Shareholder,
Amidst the current market uncertainty and
economic headwinds, we continue to focus on
the favourable long-term prospects for our portfolio.
We have been delighted to grow through the addition
of a significant value of assets during the year,
with inclusion in the FTSE-250 testament to valued
shareholder support and the stable total returns
from our well-diversified portfolio.
Chairman’s Statement
Investing in care.
Delivering returns.
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Financial Statements Additional InformationCorporate GovernanceStrategic Report
food source supplies; inflation; monetary
policy tightening by Central Banks and
fast-rising interest rates; the cost of living
crisis, and general fears of a significant
economic downturn/recession. The re-
pricing of financial assets is likely to arise
with commercial real estate tipped by many
to bear the brunt, as reflected in the sector’s
recent share price movements.
However, our investment class benefits from
tailwinds. Underlying demand for residential
care places is supported by demographic
change, evidenced by projected growth in
the number of over 85s, and investment
demand for modern, ESG-compliant care
home real estate remains strong.
The Group has some protection from higher
interest rates, having fixed rates on £180
million of its borrowings prior to recent
market increases. On inflation, our portfolio
bias towards private pay provides comfort
that our tenants are more likely to be able to
reflect their cost increases in resident fees,
supporting sustainable trading.
3. Performance
Our total return performance over the year
has been robust, with EPRA NTA* growth
of 1.7% (112.3 pence from 110.4 pence)
underpinned by a portfolio which has
performed resiliently.
The Manager comments in more detail
on rent cover and occupancy on page 14,
with these key metrics trending positively
as trading in the homes improves further
following the Omicron impacts earlier
in 2022.
Growth in the portfolio’s valuation has
largely been driven by rental uplifts, with
some additional yield tightening from strength
of demand, providing an overall like-for-
like increase of 4.2%. Contracted rent has
increased by 35% to £55.5 million, including
4.6% on a like-for-like basis.
Under the widely-used EPRA earnings metric
the dividend was 95% covered, though we
focus on an adjusted EPRA earnings per share
result of 5.05 pence. Adjusted EPRA earnings
increased by 16% to £30.2 million, translating
to 72% cover.
4. Investment market and care
home trading
There remains a weight of capital investing
in the ESG-compliant, modern homes which
are our staple. Demand and activity has
not yet dampened in response to either the
wider macro-environment or the sector’s
trading difficulties through “late-COVID”.
We note valuations starting to soften in other
commercial real estate sectors and would be
surprised were ours to be immune. However,
high volatility is not something inherent
in the asset class and we would note the
performance of premium quality homes
relative to the yield expansion in poorer
quality homes following the 2007-08 global
financial crisis.
The sector’s challenges this past year
are well-documented, and the Manager
discusses these in more detail on pages 14
and 15. We are pleased to see the sustained
rise in occupancy levels in our homes.
Whilst homes with a focus on publicly
funded residents have outperformed those
focusing on the private market through
much of the pandemic, this has recently
reversed and the majority of our tenants
report a positive outlook.
5. Governance
Board succession
The succession plan detailed in last year’s
report is drawing to a successful conclusion.
We were pleased to welcome Dr Amanda
Thompsell to the Board on 1 February 2022
and, subsequent to the year end, Richard
Cotton has also been appointed. The
appointment of Michael Brodtman, expected
early in the next calendar year, will complete
the planned changes to the Board.
Having previously announced my intention
to retire following the conclusion of the
forthcoming AGM, along with Gordon
Coull, this will be my last statement to
shareholders. However, in handing over
the chair to Alison Fyfe, ably supported by
an experienced and skilled Board, I know
I am leaving the Company in good hands.
Annual General Meeting (‘AGM’)
The AGM will be held on 6 December 2022.
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.
6. Looking ahead
Our immediate focus is on moving as quickly
as possible towards full rent collection, for
which initiatives are in progress and remain
under our control. We have a solid track
record of achieving change in the portfolio
when required.
We continually review our investment policy
and business model and believe both to
be sound. We expect our ESG-compliant
modern assets to provide sustainable long-
term returns, and in volatile times such as
these we are thankful to have remained
prudent in the rents we have set, capital
prices paid and in our borrowing levels
and terms.
Our portfolio consists of premium quality
assets in a non-cyclical investment class
where underlying trading is improving as
COVID-19 recedes.
The interest rate environment has a
significant impact on our path to full dividend
cover. Drawing available debt to fund
portfolio growth is not currently accretive
to earnings, having a negative impact to
cover of c.10% relative to what our planning
showed a few short weeks ago. We have
a stable platform providing a clear path
to cover exceeding 90% and will closely
watch interest rates with a view to acting
quickly on our borrowings should market
conditions improve.
Given the current environment, we believe
it is prudent to maintain our dividend level,
though will be mindful of any further adverse
impact that the many matters outwith our
control may have.
The Board remains confident in the Group’s
prospects and I would personally like to
thank shareholders for their support. We
collectively are making a positive social
impact through our committed backing
of the care sector.
Malcolm Naish
Chairman
11 October 2022
* Further details on the EPRA and alternative
performance measures quoted in this report are
included in both the glossary and on pages 95 to 97.
6 Target Healthcare REIT plc
Business Model
Responsible investment in
better care home real estate
We invest in ESG-compliant, purpose-built care home real estate
commensurate with modern living standards. Our objective to
deliver long-term sustainable returns is achieved through long-
term leases, with inflation-linked annual growth, to trusted care
providers. Underlying demand is backed by demographic trends,
the demand/supply imbalance for modern care home places,
and a diversified funding of care costs from both private and
public sources.
Why we do it
We are advocates of the benefits
that intelligently designed,
purpose-built care homes
can bring and we want more
residents, care professionals,
families and local communities
to benefit from their positive
social impact.
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.
Strategic pillars
To grow a robust portfolio
Our focus is on real estate quality and stability for the
long-term.
Read more on pages 16 and 17 >>
Sector specialist portfolio management that
values relationships
To effectively manage relationships within a complex
sector as a highly engaged landlord.
Read more on pages 18 and 19 >>
Regular dividends for shareholders
Our focus is on disciplined and conservative financial
and risk management to deliver earnings supporting
quarterly dividends.
Read more on pages 20 and 21 >>
To achieve our social purpose via responsible
and sustainable investment
Our focus is on our social impact, allied with a firm
commitment to environmental sustainability and
good governance.
Read more on pages 22 and 23 >>
Responsible investment
underpins our strategy
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How we do it
– Clearly defined house view on investible asset standards,
both minimum and aspirational.
– Stable and experienced team of sector experts.
– Strong reputation and track record in completing transactions
and fostering relationships.
– Conviction to build a portfolio highly diversified by tenant,
geography and end-user payment profile.
– Collaborative approach to tenant relationships, inclusive
of sharing knowledge, insight and best practice.
– Regular asset visits and frequent dialogue with tenants at
operational and senior management levels.
– Data-led. Comprehensive collection and analysis of monthly
asset data to consider performance and trends.
– Long income visibility with inflation-linked annual growth.
– Capital structuring focus on conservative gearing levels.
– Advantages from non-cyclical sector, with portfolio
construction and diversification further reducing volatility/risk.
– Commit to our approach, and understand our influence.
– Learn, reflect, respond to feedback.
– Hold ourselves to high standards expected for social care
stakeholders.
2022 highlights
£223m
acquisitions, including
18 home portfolio
4.2%
like-for-like valuation growth
34
tenantsants at 30 June
2022
100%
portfolio occupancy
9/10
tenant satisfaction
95%
rent collection
Read more on page 19 >>
6.76
pence dividend
8.1%
NAV total return
5.05
pence adjusted EPRA EPS
4.6%
like-for-like rental growth
– Outlined comprehensive list of ESG commitments.
– Progress in collection of energy consumption data.
8 Target Healthcare REIT plc
1 98% of assets in the portfolio are subject to annual uplifts linked to inflation. The remaining homes have either five-yearly uplifts (linked to inflation) or fixed uplifts.
2 A further 269 beds will be added to the portfolio on completion of the four development sites.
High quality real estate
Homes
101
Portfolio
£912m market value
£55m contracted rent
Diversified
Tenants
34
Fee sources
67% private
33% public
Long-term focus
WAULT
27. 2 years
Upwards only rent reviews
1
99% inflation-linked leases
1% fixed/other leases
Scale
Beds
6,703
2
Track record
Accounting total return (annualised)
7.8% since launch
Prudent
Net loan-to-value
22.0%
At a Glance
Principled investment
exclusively in well-
designed, purpose-
built care homes
Portfolio at 30 June 2022
Business
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4
2
1
18
26
7
13
5
4
13
8
MSCI Region
Number of
properties
Contracted
rent
(£m)
Market
value
(£m)
Yorkshire & The Humber 26 13.0 217.4
South East 13 8.5 158.0
North West 18 9.4 145.4
East Midlands 13 6.8 102.5
Scotland 8 4.2 69.2
West Midlands 7 4.1 65.8
South West 4 3.7 60.5
Eastern 5 2.6 46.2
Northern Ireland 4 1.6 21.4
North East 2 1.1 17. 3
Wales 1 0.5 7.9
Total 101 55.5 911.6
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.
= Number of properties in region
1
10 Target Healthcare REIT plc
Environmental, Social and Governance
Targeting
Tomorrow
Targeting Tomorrow is our Environmental, Social and 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
delivers tangible benefits.
We will shortly publish our inaugural report on our ESG activities which will
provide further insight.
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ESG PRINCIPLES
1. Responsible
investment
2. Responsible
partnerships
3. Responsible
business
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.
We engage with all our stakeholders
to drive the creation of economic,
social and environmental value around
our buildings and in wider society.
We will treat all stakeholders with
respect and deal fairly in a manner
consistent with how we would
expect to be treated ourselves.
Environmental
Social
Governance/Transparency
EPC ratings
1
92% A-B ratings
100% A-C ratings
Important measure of energy efficiency
and a mandatory legislative rating.
BREEAM assessments
An additional independent rating
providing improvement suggestions.
Commissioned assessments for ten
homes considered to be a representative
sample of the portfolio.
Excellent & Very Good ratings have
been received for five of the six homes
for which ratings finalised to date.
Energy consumption
data
Data volunteered by tenants for 40%
of portfolio.
Provision in new leases to mandate
data sharing.
Wet-rooms
96%
Defining proxy for real estate quality
and social impact.
National Comparative: 29%
M
2
per resident
47m
2
We assess this against peers
and compare favourably.
Homes/beds created
since launch with
our backing
15/1,018
A further measure of our social impact
in supporting the sector’s transition to
fit-for-purpose real estate.
ESG committee
established
Post year-end, the ESG committee was
established, providing appropriate focus
and impetus to ESG matters.
First GRESB
submission
Data collected and submitted to GRESB
(an industry standard real estate sector
ESG benchmark), to aid transparency
and obtain comparable benchmarking
data on performance and trends.
Board diversity
Board composition is, and is expected
to remain after planned changes,
40% female, surpassing the Hampton-
Alexander review recommendations.
1 Non-English homes converted to English equivalent ratings.
12 Target Healthcare REIT plc
Environmental, Social and Governance continued
Our ESG commitments
Commitment Status Progress and insight
Responsible investment
Continue to provide better care home real
estate which provides positive social impact to
residents, their carers and local communities.
– No compromise on quality.
– 100% of our homes are purpose-built and
thoughtfully designed, with en suite wet-
rooms, sector-leading space per resident,
facilities for staff and include social and
outdoor spaces.
Support the sector’s transition from poor
real estate standards via long-term financial/
investment support for new developments.
15 new care homes (1,018 beds, £179 million
committed) to fund new build care homes
since launch.
Obtain data on the energy efficiency of our real
estate in insightful and comparable ways.
BREEAM-in-use assessments commissioned
on a representative sample of our portfolio.
10 assets selected, six assessments received
with five of those scoring Excellent or Very
Good with useful feedback/recommendations
obtained. Assessments will be obtained for all
subsequent acquisitions.
Obtain more data on energy consumption by
tenants from our real estate. This will support our
efforts as an engaged and influential landlord,
as well as providing data for future disclosure,
consistent with our transparency objectives.
Relevant and useful data from 40% of portfolio
through collaboration and engagement with
our tenants.
“Green lease” provision included within standard
lease terms.
Data being assessed, feeds into GRESB, will
inform/guide future actions.
Ensure ESG factors are embedded into the
acquisition process and portfolio management.
Manager “house standard” process formalised
with support of external consultants. Allows
Manager to prepare a balanced scorecard of
ESG factors for each potential investment asset,
to be considered as part of all future acquisitions.
Net zero commitment.
Current priority is data gathering in respect of
‘Scope 3’ emissions. Anticipate a target to be
set which is ahead of COP 26’s 2050 goal.
We are gathering data to allow the setting of ambitious but realistic carbon
targets. Social impact remains fundamental to us, and our modern real estate
has sector-leading environmental ratings, however the bulk of emissions are
‘scope 3’ downstream as they relate to energy used by our tenants and their
residents. We are working closely to understand this energy usage and to
positively influence using our insight as part of our contribution to net zero.
13Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
Commitment Status Progress and insight
Responsible partnerships
Engage with tenants to ensure real estate is
meeting their operational/social impact needs.
Positive survey results once more:
– 9/10 of responders agreed that the Group’s
real estate provides a great working
environment and helps operators deliver
dignified care to residents (2021: 8/10).
Use energy data obtained from tenants
to positively impact/influence change
where possible.
Comprehensive data collection is our priority.
This will be analysed and insights provided
to stakeholders.
Opportunity exists, as an aggregator of real estate
and partner to many small/regional businesses,
to offer insights and share best practice on
energy usage which can provide benefit to
tenants/homes.
Be a responsible landlord to our tenants and
their communities through significant events/
challenges, such as COVID-19 disruption.
Conscious recognition in our business model
that care continuity and returns on shareholder
capital don’t need to be in conflict. Flexibility on
contractual lease terms and long-term support
was available to tenants encountering financial
disruption, with consensual re-tenantings
delivered where appropriate.
Responsible business
To establish an ESG committee to
provide appropriate focus and impetus
to ESG matters.
Post-year end, the ESG committee met for the
first time and approved its terms of reference.
Ensure the benefits of Board diversity
are achieved.
Board recognises the benefits of diversity, and
has consistently met the Hampton-Alexander
guidance on gender diversity over recent years.
Diversity, including ethnicity, was particularly
considered in the Board’s recruitment processes.
Participate in benchmarking and sector
appropriate programmes to provide
comparable information
Submitted inaugural GRESB data. Objective to
realise year-on-year improvement.
Other reporting: Align financial and non-financial
reporting with widely used frameworks.
– EPRA BPR (Best Practice Recommendations)
Gold Award.
– EPRA Sustainability BPR considered with
new disclosures in the forthcoming
Sustainability Report.
Early stage Partially met Met
14 Target Healthcare REIT plc
Investment Manager’s Report
Rent collection for the year was 95%, and
has measured 95% since March 2020 as the
COVID-19 pandemic emerged. Our portfolio
has shown robust performance in the face of
the depressed occupancies and other trading
challenges our tenants have encountered.
We have seen some underperforming assets,
typically reflecting our exposure to recently
opened or new-build homes and growing
tenants with a number of new homes. Start-
up losses during the pandemic have run
beyond the ordinary “fill-up” period when a
home is building occupancy and moving to
mature trading, straining financial reserves
at our tenants. We reaffirm our commitment
Portfolio performance
and UK care home
investment market
The portfolio has outperformed the MSCI UK Annual Healthcare Property Index once again, in
respect of the calendar year to 31 December 2021, with a portfolio total return of 10.5% relative to
the Index’s 9.6%. The portfolio’s annualised total return since launch now stands at 11.1% while the
portfolio’s last five-year period has an annualised total return of 10.5% relative to 8.9% for the Index.
Health & social care update
We note opposite a number
of areas which are prominent
in our minds and those of
our tenants:
Path to occupancy
recovery
Occupancy levels in our homes are
showing a steady and consistent
improvement following the decline
from the widespread embargoes during
H1 22 due to the Omicron variant and
its rate of spread. COVID-19 is now
seen as a frustration in homes, rather
than the trauma it has been.
Helping occupancy:
– Visiting is “friendlier”, with mask and
testing requirements relaxed
– Latent demand exists from delayed
admissions (300k potential residents
awaiting social worker assessment)
– Vaccinations protecting residents,
and boosters expected to become
an annual/seasonal ritual
– Homes have improved their online
presence as more decisions are
made using this medium
– Embargoes, if arising, are sensibly
restricted to floors/wings
Occupancy
Jul
21
74%
90%
88%
86%
84%
82%
80%
78%
76%
Sep
21
Aug
21
Nov
21
Oct
21
Dec
21
Feb
22
Jan
22
Apr
22
May
22
Mar
22
Jun
22
Jul
22
Aug
22
Sep
22
Mature Homes Spot Occupancy
to supporting the sector’s modernisation
and will continue to hold a proportion of
such assets in the portfolio recognising
their investment case to provide long-term
sustainable value.
Modern and ESG-compliant UK care homes
as an investment asset class have continued
to provide attractive returns with low
volatility, as shown by the chart opposite
and the data from MSCI on page 98. The risk
premia relative to other “safe” asset classes,
GP surgery funds whose rents are effectively
100% government backed, and the 15-year
gilt rate, have remained steady until recent
months where the “risk-free” gilt rate has
increased sharply. We have not yet observed
valuation/yield softening in the section of
the care home real estate market in which
we invest and note the more significant yield
impact on poorer quality care home real
estate following the 2007-08 global financial
crisis. The tailwind of stronger demand for
modern stock may moderate any valuation
response for our portfolio. This would be
consistent with the low volatility in returns
from the asset class experienced historically.
The portfolio’s EPRA topped-up Net Initial
Yield (‘NIY’) has been stable, at 5.82%
15Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
Jun 13
8%
0%
1%
2%
3%
4%
5%
6%
7%
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18
Jun 19
Jun 20 Jun 21 Jun 22
Target vs. Composite: +1.32%
Composite vs. Gilts: -0.35%
15-year
Gilt yield
to
27 Sep 22
compared with 5.83% at the start of the
year, which reflects well the trends in
market activity and pricing we have seen
and are seeing.
Following a subdued 2020 and early 2021,
market activity accelerated once more
with a weight of capital and a number of
participants eager to invest in high quality
care home real estate. Participation from
the larger European healthcare investors
continues, as they seek higher yields
than their home markets can offer, and
their pursuit of the fit-for-purpose home
types we have been advocating has
accelerated as they complement their
existing older portfolios.
H1 22 saw equity raises from UK and
European healthcare funds, with proceeds
being allocated to investment in care homes,
primarily in the premium part of the sector in
which we invest. Significant capital has also
been made available to private funds which
invest in the same. We welcome the demand
and interest in the sector though would note
we have declined to participate in a number
of acquisition processes recently where we
have not been willing to accept rental levels
offered by vendors.
We are seeing a number of development
opportunities coming to the market with
enhanced environmental credentials such as
BREEAM “Excellent” ratings. It is pleasing that
the design aspects we have long advocated
are now generally accepted in new homes,
and developers and designers are now
taking this to the next level of excellence.
We expect such opportunities to command
premium pricing and, as always, we will
carefully assess the sustainability of
rental levels in their local markets in
our considerations.
We comment on some of the “hot topic”
issues facing the sector in the box below.
An additional trend which could have
a real impact in a short timescale is the
potential for regulatory/legislative change
in relation to environmental and social
standards in respect of care home real
estate which currently falls short. The most
relevant current example is the authorities
in Wales considering mandating Net-Zero/
low-carbon standards for real estate where
residents receive public care funding. Our
immediate impact will be on ensuring any
new build homes we acquire will meet these,
or anticipated future, requirements as our
typical home already does. However, the
wider challenge for the sector and other
investors will be on the many (71%) not fit-
for-purpose homes which are being used
to deliver care to the majority of residents
in the UK.
We report on portfolio management
activities in more detail on pages 18 and 19.
Public funding of care
Consistency and clarity is still awaited,
which is frustrating for operators.
The National Insurance increase to
direct funds to health and social care,
swallowed largely by the NHS, has
since been reversed.
Policies designed to remove the “lottery
of care funding” are in some doubt also.
The “Care cap” is a long awaited and
complex plan to track an individual’s
care costs across their lifetime, capping
when required to protect from the
“catastrophic costs” described in the
2010/11 Dilnot Report. The testing and
assessment of Local Authority ‘Pilot’
areas has already been pushed back,
with the reasonable conclusion being
that introduction of the policy,
if adopted, would also be delayed.
The adequacy of both manpower to
administer the policy, and the funding
requirement, have been raised as
concerns, resulting in some legitimately
founded anticipation that the whole
policy may find “the long grass” as
the Government prioritises other
workstreams.
Staffing pressures
Following admissions, staffing
remains perhaps the biggest day-to-
day headache, though solutions are
being found. With access to EU staff
restricted, many operators are taking
advantage of Government Sponsorship
Licences to bring nursing and senior
care staff from countries such as the
Philippines and India, where language
and training are reasonably aligned with
the UK.
We have seen some encouraging
internal solutions from our tenants also,
with more investment in training and
development, as well as recognition
through enhanced policies which
reward loyalty and contribution.
Ensuring adequate staffing allows
operators to grow occupancy.
Inflationary pressures
“Household costs” have been a
relatively small part of the typical care
home’s expenditure, with staffing
consuming the lion’s share of turnover,
however inflation will erode margins
unless fees can keep pace. With recent
reports of 10-20% rises in private fees
to reflect staff/household inflationary
pressures there is some indication
that for our care homes this will be
achievable, although public funding
is potentially less likely to keep pace
with this than private feepayers are.
Feedback from tenants suggests that
an excess in energy cost inflation would
be passed onto residents through
private fee increases.
Yield progression chart
Target Listed Primary Healthcare Composite UK 15-year Gilts
16 Target Healthcare REIT plc
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 6 and 7. 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.
Significant portfolio growth
The Group’s portfolio has historically been
assembled in small increments, both by
necessity, due to the relatively low number
of assets which meet our investment
quality criteria, and deliberately, as we have
maintained a bias towards smaller, regional
operators. In the current year a portfolio
of homes was marketed by an institutional
investor whose vehicle was at the end
of its life. The Manager was familiar with
those assets, having advised that vehicle
on acquisition and management of many
of the homes. The Group was ultimately
successful in the acquisition of a diversified
portfolio of 18 modern homes for c.£160
million, including costs, in December 2021
(a number of weeks later than hoped due
to COVID-19 accessibility restrictions) and
support from shareholders was secured via
new equity issuance. Overall, £223 million
(including costs) has been committed to
24 new assets during the year, growing the
portfolio to 101, comprising 97 operational
care homes and four development sites.
We create better homes
to achieve a better
standard of care
Three existing development sites reached
practical completion, adding 206 brand
new beds to their local markets and bringing
total new homes supported by the Group’s
development commitments to 11 (749 beds),
with four currently under construction which
will provide a further 269 new beds.
199.4
27.4
684.8
911.6
400
500
700
600
800
900
1000
Acquisitions and
developments
Rent reviews
and yield shifts
30 June 21 30 June 22
Increase
Total
Valuation growth analysis (£ millions)
Investment discipline maintained
In addition to the physical real estate, our
investment appraisals remain focussed on
(i) the local market and trading prospects for
a home and (ii) sustainable rental levels for
a home in that context. This approach has
not changed and will continue to guide our
assessment of long-term value during the
competitive conditions we currently see.
Key metrics for acquisitions completed
during the year were consistent with
portfolio metrics at the start of the year,
see table below.
EPRA topped-up NIY at
30 June 2021 5.83%
Blended NIY on acquisitions
during the year 5.64%
EPRA topped-up NIY at
30 June 2022 5.82%
17Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
Portfolio
Differentiators
We know the standard of UK care home
real estate. The KPIs below benchmark
well against peer group portfolios and
provide assurance as to long-term
sustainable returns.
En suite WC rooms 100%
En suite wet-rooms with shower 96%
Purpose-Built 2010s+ 79%
Purpose-Built 00s 18%
Purpose-Built 90s 3%
Purpose-Built pre-90s 0%
Converted property 0%
Average sqm per bedroom 47
EPC B or better 92%
EPC C 8%
EPC D or worse 0%
Average value per bed £132k
Value per built sqm £2,871
Average rent per bed per annum £8.3k
Rent per built sqm £175
The continued tightening of NIYs, relative
to the increase in gilt yields (the traditional
“risk-free” benchmark), of course may be
suggestive that the top of the market may
have been reached for this cycle. Whilst the
weight of capital coveting fit-for-purpose
assets counters that, the drop in spread/
yield gap between rental yields and cost
of funding goes some way to discouraging
new investment from us at this time.
The Manager’s ESG House Standard was
developed and adopted during the year, and
will be used as a tool to ensure compliant
assets are added to the portfolio.
Diversification
We continue to diversify the portfolio, most
importantly increasing the number of tenants
and mitigating risk from over-concentration
on a small number of tenant groups. The
Group now has 34 tenants, having grown
from 28, and will increase to 36 following
practical completion of the Group’s
development assets.
49%
33%
18%
Private
Part Private
Public
Underlying fee income diversification
The largest tenant is unchanged from 2021,
being Ideal Carehomes who operate 18 of
the Group’s homes and account for 15.7%
of contractual rent as at 30 June 2022.
Underlying resident fees are balanced
between private and public sources, with a
deliberate bias towards the former. Census
data from our tenants shows private sources
contribute to 67% of fee revenue, with 49%
being fully private and 18% from “top-up”
payments where residents pay over and
above that which the Local Authority
funds for them. 33% of residents are
wholly publicly funded.
Geographically, Yorkshire & the Humber
remains the largest region by asset value,
at 24%.
18 Target Healthcare REIT plc
Our Strategy continued
STRATEGIC PILLAR #2
Sector specialist portfolio
management that values relationships
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.
Positive returns
The portfolio total return has again
outperformed the MSCI UK Annual
Healthcare Property Index, with a total
return for the calendar year to 31 December
2021 of 10.5 per cent relative to the Index’s
9.6 per cent. This outperformance has
occurred consistently since launch in
2013 (see chart opposite).
NAV total return also remains stable and
consistent, at 8.1 per cent for the year to
June 2022, and with an annualised
7.8 per cent since launch.
Underpinning these returns figures are
quality assets with attractive long-term
leases. Like-for-like rental growth of
4.6 per cent has been achieved with
3.8 per cent of this from annual rent reviews
and the remainder from re-tenanting
initiatives. Like-for-like valuation growth
was 4.2 per cent driven by rent reviews,
the demand for the asset class and the
portfolio’s stable trading performance.
Overall, the Group’s portfolio value
has increased by 33.1 per cent and the
contractual rent roll by 34.6 per cent.
Portfolio total returns
10.5% vs. 9.6%
ahead of the relevant annual MSCI index
(year to 31 December 2021)
The Manager has been supporting tenants,
closely monitoring home performance and
actively initiating changes where required.
As well as protecting long-term value for
shareholders, the Manager strives to ensure
continuity of care for residents as a social
priority, and is pleased to note that all
portfolio initiatives have seen care provided
throughout. Completed and ongoing
initiatives are summarised in the box on
page 19.
Jul
21
74%
90%
88%
86%
84%
82%
80%
78%
76%
Sep
21
Aug
21
Nov
21
Oct
21
Dec
21
Feb
22
Jan
22
Apr
22
May
22
Mar
22
Jun
22
Jul
22
Aug
22
Sep
22
Occupancy chart
10.5
9.6
8.2
6.8
9.2
7.4
12.7
9.1
11.9
11.7
10.6
7.9
14.5
10.3
0%
5%
10%
15%
20%
2015 2020 20212019201820172016
Portfolio total return vs MSCI
MSCI UK Annual Healthcare Property Index
Total Return
Target Healthcare REIT Portfolio Total Return
Resiliency through pandemic; trading
outlook much improved
Rent collection measured 95% for the year,
including amounts collected subsequent
to the year-end, with a 95% collection
record since the start of the pandemic
in March 2020. This stable performance
comes despite the significant operational
challenges our tenants have faced through
the pandemic, demonstrating the sustainable
nature of our underlying rental income.
Resident occupancies are recovering
following the Omicron wave in the first half
of 2022 with steady growth since March of
this year – see chart opposite. Our tenants
continue to report strong enquiry levels and
are now consistently converting these to
admissions as restrictions have eased.
Rent cover at the portfolio level has
been stable and should respond with
the recovery in occupancy levels. We
anticipate inflationary cost increases to
largely be passed on to residents through
fee increases, allowing rent covers to
improve with occupancy.
19Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
Tenant engagement and satisfaction
We remain committed to our role as an
effective, supportive and engaged landlord.
We once again invited our tenants to
provide formal feedback via a survey which,
alongside learnings from the many points
of contact we have, is used to inform our
approach. The survey returned positive
quantitative results, and more usefully
some qualitative feedback on how we
may consider altering our interactions
with tenants to recognise that no two
tenants are the same.
In summary:
– 9/10 of responders agreed that working
with Target was a positive experience
(2021: 10/10)
– 9/10 of responders agreed that Target
provides real estate that is a great working
environment and helps deliver dignified
care to residents (2021: 8/10)
– 10/10 of responders agreed that Target
participates in sector events and
appropriately shares knowledge
Resident satisfaction
Regulator (CQC in England) ratings are
informative but limited. The Manager also
monitors reviews on “Carehome.co.uk”, a
“Tripadvisor” style website for care homes,
as a useful source of real-time feedback which
is more focussed on the resident experience,
and that of their loved ones.
The portfolio’s current average rating is
9.3/10 with sufficient review volume and
frequency to be considered a valuable data
point for the quality of service experienced
by residents.
Investing in
sustainable
relationships
Group of homes in
Northern Ireland identified
as likely to benefit from new
management. Re-tenanting
initiated and completed
from large national to a
smaller operator focused
on the region.
Alternative tenants were
lined-up for seven homes
where the incumbent tenant
faced financial challenges.
Patient and disciplined
response allowed full
recovery of outstanding
rent and uninterrupted care
provision for residents.
Solutions proposed and
agreed to re-tenant two of
five homes allowing focus on
the incumbent tenant’s care
geography and services and
reducing liquidity strain.
20 Target Healthcare REIT plc
30 Jun
21
Adjusted
EPRA
earnings
Property
revaluations
Dividends
paid
Equity
issuance
30 Jun
22
Acquisition
costs
80
90
100
110
120
130
140
-1.5
4.7
4.8
-6.5
0.4
110.4
112.3
Our Strategy continued
STRATEGIC PILLAR #3
Regular dividends for shareholders
Total dividends of 6.76 pence per share were declared and paid in respect of the year to
30 June 2022, an increase of 0.6 per cent on 2021, and reflecting a yield of 6.2 per cent
based on the 30 June 2022 closing share price of 108.4 pence.
Earnings & dividend cover
Adjusted EPRA earnings per share is the
key performance metric used in assessing
recurring profitability levels. This reduced to
5.05 pence per share relative to dividends
of 6.76 pence per share. Dividend cover
on adjusted EPRA earnings was 72% for the
year. Applying the more widely used EPRA
earnings measure, dividend cover was 95%.
The three main drivers of reduced earnings
level were:
– Portfolio acquisition and equity issuance
proceeds. Earnings dilution from cash
drag occurred during the three-month
acquisition process following the Group’s
£125 million associated equity issuance
in September 2021. The 18 care home
assets began generating rental income
immediately upon acquisition on
17 December 2021.
– Prudent rental income provisioning.
As rent collection declined during 2022
following the Omicron wave of the
pandemic, the Group prudently provided
for an increased level of doubtful debts.
Initiatives to successfully manage
these positions have seen £1.1 million
subsequently collected which has not
been adjusted for in the year’s results. The
Manager is progressing further initiatives
to move towards full rent collection
across the portfolio.
– Uninvested capital. At 30 June 2022
the Group had cash and undrawn debt
awaiting investment of £105 million.
£54 million of this is committed to
developments or portfolio improvements
and is awaiting drawdown, with £51
million remaining available. Had the
spread level between investment yields
and debt costs which existed through
the Group’s lifetime persisted, conversion
of the Group’s identified pipeline assets
would have seen the Group fully geared
and invested and generating earnings fully
covering dividends.
EPRA NTA per share (pence)
EPRA NTA per share has increased to 112.3 pence, primarily driven by an increase in property
valuations. See the yield progression chart on page 15 for more context.
Increase
Decrease
Total
However, the significant reduction in that
spread (from c.250 bps to nil) impacts the
Group’s ability to invest available capital in
immediately earnings-accretive assets at the
current time. The Group is carefully assessing
pipeline assets on a case-by-case basis with
respect to wider market conditions, and is
currently minded to retain a conservative
buffer of uninvested capital as a defence
against further market deterioration.
The combined effect of the above is that the
long-planned progression to full investment
at targeted gearing levels will be delayed,
with the knock-on effect to also delay the
Group’s path to full dividend cover.
Total Returns
The attractive investment characteristics
of the asset class has seen continued yield
tightening and valuation increases. Whilst
limiting earnings-accretive new investment,
this has been a tailwind for valuation growth
and returns from the existing portfolio.
EPRA NTA has increased 1.7% to 112.3 pence
per share over the year. NAV total return for
the year was 8.1%, with the portfolio’s EPRA
topped-up net initial yield ending the year
stable at 5.82% from 5.83%.
Debt funding: More fixed interest rates
and longer terms
The Group entered new long-term, fixed-rate
facilities of £100 million with an existing
lender during the year, increasing total debt
available to £320 million.
This increased the weighted average term
to maturity of the Group’s facilities to 6.9
years at 30 June 2022 (2021: 4.8 years) and
increased the quantum of the Group’s drawn
debt at fixed interest rates, being £180 million
at 30 June 2022 (2021: £80 million).
The Group’s weighted average cost (interest-
only) of its drawn debt was 3.1%, reflecting
the low-rate environment when these
fixes were struck. In December 2021 when
the most recent 15-year debt transaction
completed, the relevant gilt reference was
c.1% compared to c.4.5% today.
The Group retains flexibility on debt
levels, with £140 million of revolving credit
facilities which can be drawn/repaid in-line
with capital requirements. The Group is
currently reviewing the suitability of these
facilities given the interest rate environment
and outlook and anticipates increasing
fixed-rate or hedged debt, subject to
market conditions.
21Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
£140m
£180m
£55m
£180m
£0m
£100m
£90m
£80m
£70m
£60m
£50m
£40m
£30m
£20m
£10m
2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037
Earnings summary
2022
(£m) Movement
2021
(£m)
Rental income (excluding guaranteed uplifts) 49.8 +21% 41.2
Administrative expenses (including management fee) (13.7) +23% (11.1)
Net financing costs (6.6) +38% (4.8)
Interest from development funding 0.8 +33% 0.6
Adjusted EPRA earnings 30.2 +16% 26.0
Adjusted EPRA EPS (pence) 5.05 -7.5% 5.46
EPRA EPS (pence) 6.62 -7. 5% 7.16
Adjusted EPRA cost ratio 27.1% +50bps 26.6%
EPRA cost ratio 21.5% -80bps 22.3%
Ongoing charges figure (‘OCF’) 1.51% -4bps 1.55%
Debt facilities at 30 June 2022 Drawn debt at 30 June 2022
Debt facility maturities
Revolving credit facility
Fixed rate
Revolving credit facility
Fixed rate
HSBC
RBS
Phoenix Group
22 Target Healthcare REIT plc
Our Strategy continued
What this means for Target SDGs What we did in 2022 What we’ll do in 2023 and beyond
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 and 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.
Social
– 24 homes acquired, 1,632 resident spaces
– Development commitments for 269 new beds
as at year-end
– 96% wet-rooms
– Homes provide space of 47m
2
per resident
– All real estate has generous social and useable
outdoor space
Energy
– 100% A-C EPC ratings
– Manager created and adopted “house standard”
to formally incorporate minimum and aspirational
ESG standards into investment appraisal
– Representative sample of BREEAM-in use ratings
substantially Excellent and Very Good
– Increased data collection from our tenants on
energy usage equating to 40% of the portfolio
– Target Fund Managers supports the Edinburgh
Science Climate and Sustainability programme
being a founding pledger of its Mission Net Zero
project
Social
– Continue to advocate for quality real estate
– Continue to fund new homes, modernising
the sector’s real estate
Energy
– Assess BREEAM recommendations and initiate
improvements where aligned with long-term value
– 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
Tenant selection, engagement and 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 are respected and residents are cared for with dignity.
– We 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.
Tenants
– 9/10 “positive experience” satisfaction score
Communities
– Re-tenanted homes with new tenants committed
to continuing care provision where required
– Worked constructively with tenants in rental arrears
to deliver positive solutions to maintain continuity
of care
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 feedback from tenant survey
Communities
– Complete portfolio initiatives identified which
will benefit long-term care continuity
– Continue to facilitate tenant interaction and
learning sessions as COVID-19 restrictions ease
Governance and 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.
Governance and transparency
– Undertook director recruitment process resulting
in Vince Niblett and Amanda Thompsell being
appointed during the year
– Investment Manager successfully retained position
as a signatory to the FRC Stewardship Code
– £13.2 million taxation directly paid to the UK
government by way of VAT and stamp duty land
taxes. Dividends paid of £40.0 million are assessed
for tax upon reaching shareholders
Governance and transparency
– Complete Board succession plan by appointing
two new Directors
– To prepare and publish enhanced reporting suite,
inclusive of:
– GRESB reporting following data collection
process
– Comprehensive sustainability reporting,
inclusive of EPRA measures
STRATEGIC PILLAR #4
To achieve our social purpose
ESG principle
1. 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.
2. 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.
3. 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.
23Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
What this means for Target SDGs What we did in 2022 What we’ll do in 2023 and beyond
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 and 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.
Social
– 24 homes acquired, 1,632 resident spaces
– Development commitments for 269 new beds
as at year-end
– 96% wet-rooms
– Homes provide space of 47m
2
per resident
– All real estate has generous social and useable
outdoor space
Energy
– 100% A-C EPC ratings
– Manager created and adopted “house standard”
to formally incorporate minimum and aspirational
ESG standards into investment appraisal
– Representative sample of BREEAM-in use ratings
substantially Excellent and Very Good
– Increased data collection from our tenants on
energy usage equating to 40% of the portfolio
– Target Fund Managers supports the Edinburgh
Science Climate and Sustainability programme
being a founding pledger of its Mission Net Zero
project
Social
– Continue to advocate for quality real estate
– Continue to fund new homes, modernising
the sector’s real estate
Energy
– Assess BREEAM recommendations and initiate
improvements where aligned with long-term value
– 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
Tenant selection, engagement and 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 are respected and residents are cared for with dignity.
– We 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.
Tenants
– 9/10 “positive experience” satisfaction score
Communities
– Re-tenanted homes with new tenants committed
to continuing care provision where required
– Worked constructively with tenants in rental arrears
to deliver positive solutions to maintain continuity
of care
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 feedback from tenant survey
Communities
– Complete portfolio initiatives identified which
will benefit long-term care continuity
– Continue to facilitate tenant interaction and
learning sessions as COVID-19 restrictions ease
Governance and 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.
Governance and transparency
– Undertook director recruitment process resulting
in Vince Niblett and Amanda Thompsell being
appointed during the year
– Investment Manager successfully retained position
as a signatory to the FRC Stewardship Code
– £13.2 million taxation directly paid to the UK
government by way of VAT and stamp duty land
taxes. Dividends paid of £40.0 million are assessed
for tax upon reaching shareholders
Governance and transparency
– Complete Board succession plan by appointing
two new Directors
– To prepare and publish enhanced reporting suite,
inclusive of:
– GRESB reporting following data collection
process
– Comprehensive sustainability reporting,
inclusive of EPRA measures
24 Target Healthcare REIT plc
Risk Report
Risk
Description of risk and factors affecting
risk rating
Mitigation
Risk rating
& change
Poor
performance
of assets
There is a risk that a tenant’s business could
become unsustainable if it fails to trade
successfully. 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.
The Investment Manager focuses on tenant
diversification across the portfolio and,
considering the local market dynamics for
each home, 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. The
Investment Manager has ongoing engagement
with the Group’s tenants to proactively assist
and monitor performance.
High
Adverse interest
rate fluctuations
/ debt covenant
compliance
Adverse interest rate fluctuations will increase the
cost of the Group’s variable rate debt facilities;
limit borrowing capacity; adversely impact
property valuations; and be detrimental to
the Group’s overall returns.
The Group has a conservative gearing
strategy, although net gearing is anticipated
to increase as the Group nears full investment.
Loan covenants and liquidity levels are closely
monitored for compliance and headroom. The
Group has fixed interest costs on £180 million
of borrowings as at 30 June 2022.
High
High inflationary
environment
(emerging)
An increase in the UK inflation rate to a level
above the rent review caps in place across the
portfolio’s long-term leases may result in a real
term decrease in the Group’s income and be
detrimental to its performance. In addition,
cost increases for tenants, particularly in
relation to staffing and utilities, may erode
their profitability and rent cover unless their
revenue increases accordingly.
The Group’s portfolio includes inflation-
linked leases, with primarily annual upwards-
only rent reviews within a cap and collar.
The Manager is monitoring tenant
performance, including whether average
weekly fees paid by the underlying diversified
mix of publicly funded and private-fee paying
residents are growing in line with inflation.
High
NEW
Development
costs (emerging)
The high inflationary environment, particularly
for building materials and staff, combined
with supply chain difficulties, may result in an
increased risk that the developers of contracted
developments do not fulfil their obligations
and/or may increase the cost of new
development opportunities.
The Group is not significantly exposed to
development risk, with forward funded
acquisitions being developed under fixed price
contracts, with the Investment Manager having
considered both the financial strength of the
developer and the ability of the developer’s
profit to absorb any cost overruns.
Medium
NEW
Pandemic
reduces
demand for
care home beds
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,
occupancy across the sector remains below
pre-pandemic levels and the emergence of
new variants of COVID-19 remains a possibility.
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. A trend of improving
occupancy rates across the portfolio has
been noted in recent times.
Medium
ESG and climate
change
A change in climate, such as an increased
risk of local or coastal flooding, or a change
in tenant/investor demands or regulatory
requirements for properties which meet certain
environmental criteria, such as integral heat
pumps, may result in a fall in demand for the
Group’s properties, reducing rental income
and/or property valuations.
The Group is committed to investing in high
quality real estate with high quality operators.
The portfolio’s EPC and BREEAM in-use
ratings suggest the portfolio is well positioned
to meet future requirements/ expectations.
The Investment Manager has introduced a
house standard to ensure ESG factors are fully
considered during the acquisition process.
Medium
NEW
Principal and emerging
risks and risk management
25Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
Risk
Description of risk and factors affecting
risk rating
Mitigation
Risk rating
& change
Reduced
availability of
carers, nurses
and other care
home staff
The combined impacts of the pandemic and
increased employment and wage inflation in
competing sectors 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.
The Group is committed to investing in
high quality real estate with high quality
operators and these should be better placed
to attract staff. The Investment Manager
continues to engage with tenants in the
portfolio and to share examples of best
practice in recruitment and retention of staff.
Medium
Breach
of REIT
regulations
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.
Medium
Changes in
government
policies
Changes in government policies, including those
affecting local authority funding of care, may
render the Group’s strategy inappropriate. Secure
income and property valuations will be at risk if
tenant finances suffer from policy changes.
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 not wholly dependent on
government funding.
Medium
Availability
of capital
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.
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 and
quantum of its debt facilities.
Medium
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, compliance or
shareholder relations.
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.
Medium
Failure to
differentiate
qualities from
competitors or
poor investment
performance
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 these
effectively to stakeholders could have a negative
impact on the Company’s share price, future
demand for equity raises and/or debt finance
and wider reputational damage.
The stakeholder communications strategy of
the Group has always been to highlight the
quality of the real estate in which the Group
invests. The regular production of investor
relations materials (annual and interim reports,
investor presentations and quarterly factsheets)
along with direct engagement with investors
helps to mitigate this risk.
Medium
The Company’s risk matrix is reviewed regularly by the Board as detailed on page 45. 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 34 and 35.
Strategic objectives Risk trend
To grow a
robust portfolio
Risk
increased
Risk
unchanged
Risk
decreased
Dividend
focus
Specialist,
engaged manager
Responsible
investment
26 Target Healthcare REIT plc
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 (1) (a)-(f) of the Companies Act 2006 for the financial year to 30 June 2022, 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 27.2 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
employees
The Company is externally managed and therefore has no 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 2021 remained in the
interests of all stakeholders.
Ongoing investment and
asset management activity
The Group acquired a significant portfolio in
December 2021, consisting of 18 operational
care homes of which the Investment
Manager had unparalleled knowledge. This
acquisition expanded the Group’s portfolio
of high-quality real estate, the vast majority
of which benefitted from full wet-rooms,
operated by eight tenants, three of which
were new to the Group.
The re-tenanting of four homes in Northern
Ireland was completed in the year, resulting
in a move from a large, national operator
to a smaller operator more focussed in
that local market, with the Group receiving
a surrender premium from the outgoing
tenant. Stakeholders benefitted from (i)
a positive net financial effect, following
agreed capex which will improve each
of the homes; and (ii) the addition of an
established regional operator.
Capital financing
The Company issued £125 million of
ordinary shares, at a premium to NAV, in
September 2021. The equity raised was used
to temporarily repay some of the Group’s
loan facilities whilst it awaited investment
before being utilised primarily to finance the
portfolio acquisition in December 2021.
The Group also increased its loan
facilities with Phoenix Group, increasing
the existing £50 million 10-year facility
to an aggregate of £150 million with a
weighted term to maturity of 12 years,
on terms that are expected to be beneficial
to significant stakeholders over the duration
of the facilities.
Director appointments
During the year, as part of the Board
succession plan, Mr Niblett and
Dr Thompsell were appointed as Directors.
Mr Niblett’s significant financial experience
and expertise and Dr Thompsell’s knowledge
of healthcare and care homes is expected
to benefit all stakeholders over the period
of their respective appointments.
Subsequent to the year end, the Board have
appointed one Director and have identified
another who is expected to be appointed
early in the following calendar year.
27Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
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.
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. Following disruption during the
pandemic, the Directors were pleased to be able to return to holding the AGM in person, whilst also
retaining the ability 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 intends to hold a
results presentation on the day of publication of the Annual Report and will also meet with analysts
and members of the financial press.
Tenants and underlying residents
As set out in more detail on pages 18 and 19, 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, such as carehome.co.uk. Any significant matters are discussed with the tenant and included
within the Board reporting.
Debt providers
The Group has term loan and revolving credit facilities with the Royal Bank of Scotland plc, HSBC Bank
plc and Phoenix Group (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.
Investment Manager
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 2022 are contained on page 41.
Other service providers
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, are invited to
attend Board Meetings and report directly to the Directors where appropriate.
Community and the environment
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.
28 Target Healthcare REIT plc
Board of Directors
Our experienced and
knowledgeable Board
are responsible for the
effective stewardship
of the Company.
MALCOLM NAISH GORDON COULL ALISON FYFE VINCE NIBLETT DR AMANDA THOMPSELL
Independent Non-Executive
Chairman
Independent Non-Executive
Director and Senior Independent
Director
Independent Non-Executive
Director and Chair of Nomination
and Remuneration Committees
Independent Non-Executive
Director and Chair of Audit
Committee
Independent Non-Executive
Director
Mr Naish has chaired the Company
since its launch in 2013, and
also has listed Company Board
experience via his previous roles as
a non-executive director of GCP
Student Living plc and 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.
Mr Coull served as Chair of the
Audit Committee from the Group’s
launch in 2013 until November
2021, before being appointed as
the Company’s Senior Independent
Director. He 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.
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 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.
Dr Thompsell trained and originally
practised as a GP before switching
to working in old age hospital
medicine, and then retraining in old
age psychiatry. She has significant
clinical experience of all aspects
of caring for older people and
has held a number of clinical and
national leadership roles allowing
her to develop a comprehensive
knowledge of the care home
sector. This included 17 years at the
South London and Maudsley NHS
Foundation Trust, where she led a
multidisciplinary team supporting
care homes for seven years and
was the clinical lead for long-stay
older people’s mental health unit
for a further five years.
Dr Thompsell is the National
Specialist Advisor: Older People’s
Mental Health at NHS England,
a member of the advisory board
to the Journal of Dementia Care
and a Medical Member of the First
Tier Tribunal at the UK Ministry of
Justice. She is also the previous
chair of the Faculty of Old Age
Psychiatry of the Royal College
of Psychiatrists.
Date of appointment
30 January 2013 30 January 2013 1 May 2020 25 August 2021 1 February 2022
Country of residence
UK UK UK UK UK
Independent
Yes Yes Yes Yes Yes
Other public company directorships
None None None Big Yellow Group plc
Forterra plc
None
Committee membership
Investment Committee (Chair)
Management Engagement
Committee (Chair)
Audit Committee
ESG Committee
Nomination Committee
Remuneration Committee
Audit Committee
ESG Committee
Investment Committee
Management Engagement
Committee
Nomination Committee
Remuneration Committee
Remuneration Committee (Chair)
Nomination Committee (Chair)
ESG Committee (Chair)
Audit Committee
Investment Committee
Management Engagement
Committee
Audit Committee (Chair)
ESG Committee
Investment Committee
Management Engagement
Committee
Nomination Committee
Remuneration Committee
Audit Committee
ESG Committee
Investment Committee
Management Engagement
Committee
Nomination Committee
Remuneration Committee
29Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
MALCOLM NAISH GORDON COULL ALISON FYFE VINCE NIBLETT DR AMANDA THOMPSELL
Independent Non-Executive
Chairman
Independent Non-Executive
Director and Senior Independent
Director
Independent Non-Executive
Director and Chair of Nomination
and Remuneration Committees
Independent Non-Executive
Director and Chair of Audit
Committee
Independent Non-Executive
Director
Mr Naish has chaired the Company
since its launch in 2013, and
also has listed Company Board
experience via his previous roles as
a non-executive director of GCP
Student Living plc and 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.
Mr Coull served as Chair of the
Audit Committee from the Group’s
launch in 2013 until November
2021, before being appointed as
the Company’s Senior Independent
Director. He 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.
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 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.
Dr Thompsell trained and originally
practised as a GP before switching
to working in old age hospital
medicine, and then retraining in old
age psychiatry. She has significant
clinical experience of all aspects
of caring for older people and
has held a number of clinical and
national leadership roles allowing
her to develop a comprehensive
knowledge of the care home
sector. This included 17 years at the
South London and Maudsley NHS
Foundation Trust, where she led a
multidisciplinary team supporting
care homes for seven years and
was the clinical lead for long-stay
older people’s mental health unit
for a further five years.
Dr Thompsell is the National
Specialist Advisor: Older People’s
Mental Health at NHS England,
a member of the advisory board
to the Journal of Dementia Care
and a Medical Member of the First
Tier Tribunal at the UK Ministry of
Justice. She is also the previous
chair of the Faculty of Old Age
Psychiatry of the Royal College
of Psychiatrists.
Date of appointment
30 January 2013 30 January 2013 1 May 2020 25 August 2021 1 February 2022
Country of residence
UK UK UK UK UK
Independent
Yes Yes Yes Yes Yes
Other public company directorships
None None None Big Yellow Group plc
Forterra plc
None
Committee membership
Investment Committee (Chair)
Management Engagement
Committee (Chair)
Audit Committee
ESG Committee
Nomination Committee
Remuneration Committee
Audit Committee
ESG Committee
Investment Committee
Management Engagement
Committee
Nomination Committee
Remuneration Committee
Remuneration Committee (Chair)
Nomination Committee (Chair)
ESG Committee (Chair)
Audit Committee
Investment Committee
Management Engagement
Committee
Audit Committee (Chair)
ESG Committee
Investment Committee
Management Engagement
Committee
Nomination Committee
Remuneration Committee
Audit Committee
ESG Committee
Investment Committee
Management Engagement
Committee
Nomination Committee
Remuneration Committee
Changes expected subsequent to year end:
RICHARD COTTON MICHAEL BRODTMAN
Independent Non-Executive
Director
Independent Non-Executive
Director
Mr Cotton has over 40 years
of experience in the property
sector and headed the real estate
corporate finance team at JP
Morgan Cazenove until April
2009. Subsequently he was a
Managing Director of Forum
Partners and Chairman
of Centurion Properties.
He has wide corporate
experience as a former non-
executive director of Hansteen
plc and including advisory roles
with Lloyds Bank and Transport
for London.
Mr Cotton is currently the
Chairman of Helical plc and a
consultant to Big Yellow Group
plc, where he served as a non-
executive director from 2012
until 2022.
Mr Brodtman has extensive
knowledge of the property
sector. He worked for global
property advisers CBRE for over
40 years, retiring as chairman of
the UK Advisory division in June
2022. He led the firm’s Valuation
department for over 20 years, and
served on its Executive Board and
Operating Committee, respectively
responsible for strategic direction
and day-to-day management.
He is a Fellow of the Royal
Institution of Chartered Surveyors,
and has been extensively involved
with the RICS throughout his
professional career. He was
formerly a member of the Policy
Committee of the British Property
Federation, the RICS Global
Valuation Professional Board and
the Bank of England Commercial
Property Forum.
Mr Brodtman has further Board
experience as a former non-
executive director of Investment
Property Databank and housing
association Places for People.
He is keenly interested in the
healthcare sector, with relevant
experience from his role as a
Trustee of Jewish Care, which
provides health and social care
services for London’s Jewish
Community, including ten care
homes with some 500 residents.
Effective date of appointment Expected date of appointment
1 November 2022 1 January 2023
30 Target Healthcare REIT plc
Experts in strategic,
responsible investment
Investment Manager
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:
31Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
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 sixteen 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 sixteen
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.
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
sixteen 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, 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.
32 Target Healthcare REIT plc
Directors’ Report
The Directors present their report, along with the financial statements of the Group and Company on pages 58 to 88, for the year ended
30 June 2022.
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 14 and 15. Principal and emerging risks and uncertainties can be found on pages 24 and 25 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 1.69 pence per share, to shareholders in relation to the year ended 30 June 2022. Details of the dividends paid are set out in Note 7
to the Consolidated Financial Statements, and a breakdown of the distributions paid analysed between Property Income Distributions (‘PID’s’)
and Ordinary Dividends are provided on page 93.
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 Target Healthcare REIT
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 Financial Conduct Authority and to
trading on the Main Market of the London Stock Exchange. The Company became a constituent of the FTSE-250 Index with effect from
20 June 2022.
The Company holds a number of wholly-owned subsidiaries, both directly and indirectly, details of which are set out in Note 12 to the
Consolidated Financial Statements and Note 3 to the Company Financial Statements. These subsidiary companies hold the majority of the
Group’s investment properties and loan facilities.
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.
33Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
The Group will not acquire any asset or enter into any lease or related agreement if that would result in a breach of the conditions applying
to the Group’s REIT status.
The Group is permitted to invest cash held for working capital purposes and awaiting investment in cash deposits, gilts and money market funds.
Gearing, calculated as borrowings as a percentage of the Group’s gross assets, may not exceed 35 per cent at the time of drawdown. The
Board currently intends that, over the medium term, borrowings of the Group will represent approximately 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 28 and 29. As explained in more detail in the Corporate
Governance Statement on page 41, 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, Mr Naish, Mr Coull, Ms Fyfe, and Mr Niblett were each elected/re-elected at the AGM held on 14 December
2021. Other than Mr Naish and Mr Coull, 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 6 December 2022. Dr Thompsell was
appointed to the Board with effect from 1 February 2022, and Mr Cotton has been appointed to the Board to take effect from 1 November
2022. Each of Dr Thompsell and Mr Cotton will be subject to election by shareholders at the forthcoming AGM. As part of the recent
recruitment process, the Board has also identified one further potential Director, Mr Brodtman, who is expected to be appointed to the Board
with effect from 1 January 2023. If so appointed, Mr Brodtman will be subject to election by shareholders at the AGM to be held in 2023.
Following the retirement of Mr Naish and Mr Coull, it is intended that Ms Fyfe will be appointed as Chair of the Company and Mr Cotton will be
appointed as the Company’s Senior Independent Director.
In relation to the appointment of Dr Thompsell, the Company appointed Nurole to provide external search consultancy services for which they
received a fee of £17,000 (plus VAT). In relation to the appointment of Mr Cotton and the expected future appointment of Mr Brodtman, the
Company appointed Fletcher Jones to provide external search consultancy services for which they received an aggregate fee of £30,000 (plus
VAT). In previous years, the Company has appointed Fletcher Jones to provide external search consultancy services, to facilitate the Board
appraisal process and to advise on the level of the Directors’ remuneration. Neither the Company nor any of the individual Directors has any
other connection with either Fletcher Jones or Nurole. Further details on the recruitment processes followed, including the Board’s policy in
relation to diversity and tenure, are set out on page 41.
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. Whilst remaining cognisant of the need for regular refreshment
of the Board membership, the appointment of Mr Cotton and Mr Brodtman and the retirement of Mr Naish and Mr Coull will complete the
Board’s intended succession plan for the medium term. The Board would like to take the opportunity to thank Mr Naish and Mr Coull for their
committed service and expert guidance over the period since the Group’s launch in 2013, during which time the Company has grown from a
modest £40 million of net assets to c.£700 million and has become a constituent of the FTSE-250 Index.
The Board confirms that, following the evaluation process set out in the Corporate Governance Statement on pages 42 and 43, 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.
34 Target Healthcare REIT plc
Directors’ Report continued
Substantial Interests in Share Capital
As at 30 June 2022, the Company had received notification of the following holdings of voting rights (under the Financial Conduct Authority’s
Disclosure Guidance and Transparency Rules):
Number of
Ordinary Shares
held
Percentage
held*
Blackrock, Inc 63,576,294 10.3**
Baillie Gifford & Co 25,358,041 4.1
Premier Miton Group plc 24,348,972 3.9
Alder Investment Management Limited 23,681,156 3.8
Investec Wealth & Investment Limited 23,385,150 3.8
CCLA Investment Management Limited 17,918,605 2.9
Rathbone Investment Management Limited 17,462,203 2.8
* Based on 620,237,346 ordinary shares in issue as at 30 June 2022.
** The Company is not aware, nor has it been notified, of any individual corporate shareholder(s), as germane to the Group’s compliance with the REIT regulations, which
were beneficially entitled to 10% or more of the Company’s share capital or which controlled 10% or more of the voting power in the Company.
As at 11 October 2022, the Company has not received notification of any 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 General Meeting held on 1 March 2021, shareholders granted authority for the Company to issue up to 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. At 1 July 2021, the
ability to issue up to 95,945,946 ordinary shares remained under this authority and the Company had the additional authority to issue up to a
further 45,748,764 ordinary shares as granted by shareholders at the Annual General Meeting held on 2 December 2020. In September 2021,
the Company issued 108,695,652 ordinary shares under these authorities at a price of 115.0 pence per ordinary share. The remaining authority
subsequently expired on 14 December 2021.
At the Annual General Meeting held on 14 December 2021, shareholders granted authority for the Company to issue up to 62,023,734
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
11 October 2022, the Company has not issued any shares under this authority. The authority will expire on the earlier of the conclusion of the
forthcoming Annual General Meeting, which is expected to be held on 6 December 2022, or 14 March 2023. It is expected that the Company
will continue to seek this authority on an annual basis.
At the Annual General Meeting held on 14 December 2021, shareholders granted authority for the Company to buy back up to 92,973,578
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 Annual General Meeting.
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 current economic conditions, including 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 fully
draw, repay, refinance or increase these facilities on, or before, their expected maturity date. As set out in more detail under the heading
‘Continuation Vote’ above and on page 36, at each fifth Annual General Meeting of the Company, including the AGM to be held on
6 December 2022, shareholders are given the opportunity to vote on an ordinary resolution to continue the Company. The Directors have
also considered the Group’s level of uninvested capital, the current status of the property investment market and the Group’s 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 2023, 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.
35Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
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 2022 which has long leases and a weighted
average unexpired lease term of 27.2 years. The Group has drawn borrowings of £234.8 million, on which the interest rate has been fixed,
either directly or through the use of interest rate swaps, on £180.0 million at a weighted interest rate of 3.07 per cent per annum (excluding
the amortisation of arrangement costs), and the remaining £54.8 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 £85.2 million of available debt under committed
loan facilities. The Group’s committed loan facilities have staggered expiry dates with £100.0 million being committed to 5 November 2024,
£70.0 million to 5 November 2025, £87.3 million to 12 January 2032 and £62.7 million to 12 January 2037. 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 24 and 25. 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;
– Adverse interest rate fluctuations: The risk that an increase in interest rates may increase the cost of the Group’s variable rate debt facilities,
impact property valuations and/or limit the Group’s borrowing capacity;
– High inflationary environment: The risk that the level of the UK inflation rate results in a real term decrease in the Group’s income or erodes
the profitability of tenants;
– 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; and
– 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 tenants’ rental cover and leading to a loss of rental income for the Group.
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
cumulative 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.
Audit Tender
In line with the intention stated in last year’s Annual Report, the Company completed a tender of audit services to the Group during the year.
Initially four audit firms, including the incumbent auditor, were invited to tender through a formal invitation letter. This set out the proposed
tender process, the timetable, the matters that the Group expected to be covered in the written tender proposal submitted and the basis
on which the audit quality offering would be assessed. Each of the tendering firms met separately with the Chairman, the Chair of the Audit
Committee and representatives of the Investment Manager in order to obtain any information necessary to prepare their proposals. After the
receipt of the written tenders from two audit firms, they each presented directly to the Audit Committee. After careful review of the written
tender proposals, the presentations and any other matters considered relevant to assessing the audit quality offering, such as a review of the
relevant FRC Audit Quality Inspection Reports, a scorecard was prepared to assess the relative merits of each proposal. Whilst this assessment
was not conducted on a ‘fee-blind’ basis, the firms were initially assessed on their expected service level. After due and careful consideration
of each of the proposals, the Audit Committee recommended to the Board that the incumbent auditors, Ernst & Young LLP, be re-appointed.
The Directors would like to express their appreciation to each of the firms that participated in the tender process. The Company does not
anticipate undertaking a further tender of audit services to the Group during the forthcoming year.
Significant Votes Against Previous Resolutions
There were no significant votes against the resolutions proposed at the Annual General Meeting held on 14 December 2021.
Resolutions to be Proposed at the AGM
Directors’ remuneration policy and annual report on Directors’ remuneration
The Directors’ remuneration policy and annual report on Directors’ remuneration, which can be found on pages 49 to 51, provide detailed
information on the remuneration arrangements for the Directors of the Company. Shareholders are requested to approve the Directors’
Annual Report on Directors’ Remuneration for the year ended 30 June 2022 (resolution 3). The Directors’ Remuneration Policy, which is
proposed for approval every three years and which is unchanged from that approved by shareholders in 2019, is being put to shareholders
at the 2022 AGM and will be proposed as an ordinary resolution (resolution 2).
Dividend policy
The Company’s dividend policy is set out on page 33. 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 4). The Directors anticipate that
such non-binding resolution to approve the Company’s dividend policy will be proposed annually.
36 Target Healthcare REIT plc
Directors’ Report continued
Resolutions to be Proposed at the AGM continued
Auditor
The Independent Auditor’s Report can be found on pages 52 to 57. 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 2023 (resolution 5).
The proposal to re-appoint EY as auditor follows the completion of an audit tender during the year, as described in more detail on page 35.
A separate resolution will be proposed to authorise the Directors to determine the Auditor’s remuneration (resolution 6).
Election of Directors
As explained in more detail on page 41, each Director is subject under the Articles of Association to election by shareholders at the AGM
following the appointment and, by policy of the Board, by annual re-election thereafter. Resolutions 7 to 10 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 28 and 29. 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.
Continuation Vote
In accordance with the 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. Such resolution is put forward
as resolution 11. If passed, under the Articles of Association such resolution will next be proposed at the ninth annual general meeting of
the Company, which would be expected to be held in 2027. If the continuance vote were not to be passed, the Directors will be required to
convene a general meeting of the Company within six months thereafter at which a special resolution will be proposed to either wind up
voluntarily or reconstruct the Company. As set out in the Strategic Report, the Board believes that the Company has continued to assemble
a portfolio of UK care homes capable of delivering stable rental returns, has a balance sheet able to support its long-term performance
objectives and operates in a sector in which the fundamentals continue to make a compelling long-term investment case. The Board
therefore believes it is in the interests of shareholders as a whole that the Company should continue. As at 11 October 2022, the Directors
are not aware of any reason why the continuation vote will not be passed.
Share Issuance Authority
The Directors are seeking authority to allot additional new shares which would not require the publication of a prospectus. Resolution 12 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 12. Based on the shares in issue at 11 October 2022, 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 13, 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 13.
The authorities granted under resolutions 12 and 13 will expire at the conclusion of the next AGM of the Company after the passing of
the resolutions, expected to be held in November 2023, 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 12 and 13 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 14 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 14. 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.
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Notice for General Meetings
Resolution 15 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 15 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 90,455 ordinary shares representing approximately 0.015 per cent
of the current issued share capital of the Company.
Directors’ Deeds of Indemnity
The Company has entered into deeds of indemnity in favour of each of the Directors. 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.
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.
The Investment Manager has in place a conflicts of interest and allocation policy which aims to ensure a fair allocation of investment
opportunities and to mitigate potential conflicts of interest that may arise where the Investment Manager provides investment management,
investment advice or other services to other funds that may have similar investment policies to that of the Company. The Company has
reviewed, and accepted, the policy which was revised during the course of the year.
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 2022, the fees paid totalled £163,000
(2021: £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 41, 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 14
and 15.
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 10 to 13 and in the Corporate Governance
Statement on page 43.
38 Target Healthcare REIT plc
Directors’ Report continued
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. Further detail on the climate risks in the portfolio are detailed in the ‘principal and emerging risks and risk management’ on page 24
and consideration of the impact of climate risks on the market value of the property portfolio is included in Notes 9 and 17 to the Consolidated
Financial Statements.
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.
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., Broadgate Tower,
20 Primrose Street, London EC2A 2EW on 6 December 2022 at 12 noon. The Notice of Annual General Meeting is set out on pages 89 to 91.
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
11 October 2022
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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 UK-adopted IFRSs.
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. 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 UK-adopted IFRSs, 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
11 October 2022
40 Target Healthcare REIT plc
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 at an external venue by the Board during October 2021 in order to
consider strategic issues. In addition to these scheduled meetings, there were a further 11 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, including 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 5 5 3 3 4 4 4 4 2 2 1 1
Gordon Coull 5 5 3 3 4 4 4 4 2 2 1 1
Alison Fyfe 5 5 3 3 4 4 4 4 2 2 1 1
Vince Niblett* 5 5 3 3 4 4 4 4 2 2 1 1
Amanda Thompsell** 2 2 2 2 2 2 2 2 1 1 – –
June Andrews OBE*** 3 3 1 1 2 2 2 2 1 1 1 1
Tom Hutchison*** 3 3 1 1 2 2 2 2 1 1 1 1
* Appointed 25 August 2021.
** Appointed 1 February 2022.
*** Retired 14 December 2021.
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.
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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.
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 Secretary, remained appropriate. This conclusion took into account the
tiered management fee structure which, following the equity issuance in September 2021, had reduced the average management fee
rate payable. 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 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 two-year notice period 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 considered the Investment Manager’s provision of Company Secretarial services and concluded that the provision of such
services did not create a conflict of interest, compromise the ability of the Board to hold the Investment Manager to account, or result in any
diminution in the quality of governance or reporting that would warrant a change in this arrangement This assessment took into consideration
the fiduciary duties of a Company Secretary, the Directors’ access to independent professional advice where necessary and the Group’s
appointment of, and regular liaison with, external legal advisers,
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 diversity, including skills and experience, gender, social and ethnic backgrounds, cogniitive and
personal strengths and length of service. These matters were all expressly considered as part of the externally-facilitated recruitment
processes completed during the course of the year, which were designed to identify a diverse range of potential candidates, with subsequent
appointments being based on merit and objective criteria to ensure the Board collectively had the necessary combinations of skills,
experience and knowledge. Following the conclusion of the Board succession plan set out on page 33, under which Mr Naish and Mr Coull
intend to retire and Mr Cotton and Mr Brodtman are expected to be appointed, the Board composition will continue to consist of three male
and two female Directors. Following the retirement of Mr Naish, Ms Fyfe will be appointed as Chair and therefore the Company will be in
compliance with the FTSE Women Leaders Review recommendation that at least one woman should occupy a senior Board role by the end
of 2025. None of the current Directors come from an ethnic minority background. All appointments will continue to be based on merit and
will not discriminate on the grounds of gender, ethnicity, socio-economic background, religion, sexual orientation, age or physical ability.
The Board is conscious of the diversity targets set out in the Listing Rules and the benefits of diversity will continue to be considered as an
important factor in all future appointments. 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 33, the Board does not currently envisage that any 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.
Independence of Directors
The Board, which is composed solely of independent non-executive Directors, regularly reviews the independence of its members. Following
the retirement of Mr Hutchison at the conclusion of the AGM on 14 December 2021, Mr Coull has performed 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.
42 Target Healthcare REIT plc
Corporate Governance Statement continued
Independence of Directors continued
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 32 and 33. 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.
Removal of Directors
The Company may by special resolution remove any Director before the expiration of his or her period of office.
Audit Committee
The Board has established an Audit Committee, the role and responsibilities of which are set out in the report on pages 44 to 46.
Remuneration Committee
The Board established a Remuneration Committee, the role and responsibilities of which are set out in the report on page 49.
ESG Committee
Subsequent to the year end, the Board has established an ESG Committee which comprises all the Directors and which is chaired by Ms Fyfe.
The Committee will oversee the formulation and implementation of the Group’s ESG policy and strategy, including scrutinising those matters
delegated to the Investment Manager. It will be responsible for proposing targets to achieve the Board’s policy objectives and will monitor
progress against those targets, taking into considering developments in relation to legal and regulatory requirements and industry practice
which may have an impact on the Group’s activities. The Committee will review and approve any material public reporting and market
disclosures, including within the Annual Report, in respect of ESG matters.
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 41.
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 and which is chaired by Ms Fyfe. 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 formally on two occasions throughout the year to ensure that the plans in place for an orderly succession
to the Board, as set out on page 33, remained appropriate and to undertake the recruitment processes for Dr Thompsell, Mr Cotton and
Mr Brodtman. Similar to the process in place in the prior year regarding the appointment of Mr Niblett, the Nomination Committee worked
with external recruitment consultants to determine the appropriate skills and experience required of the 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 Dr Thompsell be appointed as a Director with effect from
1 February 2022. Following the same process, but using a different external recruitment consultant, the Committee recommended that
Mr Cotton be appointed as a Director with effect from 1 November 2022 and that Mr Brodtman be appointed as a Director early in the next
calendar year.
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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 the
Chairman. This process involved the completion of questionnaires tailored to suit the nature of the Company and, as required, discussions
with individual Directors and individual feedback from the Chairman to each of the Directors. The evaluation of the Chairman was led by the
Senior Independent Director in consultation with all the other Directors.
The main findings of the assessment were:
– that the Board was operating well, with skill and focus on all the areas of importance; including proactive consideration of the key issues in
the Group’s Strategy and the performance of its property portfolio;
– that the meetings of the Board and Committees were effectively conducted and chaired, aided by appropriate agendas and supporting
papers, and were of sufficient duration, regularity and timeliness to support effective decision making;
– that the Directors formed a harmonious and supportive Board with a good relationship with a well-performing and values-driven
Investment Manager; and
– that the succession planning in relation to the Board had been appropriately addressed and actioned.
The conclusion from the appraisal process conducted in relation to the year ended 30 June 2022 was that the Board and each committee
was operating effectively, with an appropriate and sufficient balance of experience and skills. An assessment process led by an external
facilitator was last conducted during the year ended 30 June 2021 and the Board anticipates having an externally facilitated Board evaluation
conducted at least every three years.
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 and the level of dividend paid by the Company. 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 89 to 91. It is intended that the AGM will be held physically at the offices
of Dickson Minto, Broadgate Tower, 20 Primrose Street, London EC2A 2EW. However, as set out on page 38, shareholders are encouraged to
lodge their votes with the Registrar 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 10 to 13 and 22 to 23.
– 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 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
The Investment Manager is a signatory to the Stewardship Code published by the Financial Reporting Council on 6 September 2021.
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. The Investment Manager’s Stewardship Code Statement of Compliance is
available on its website at www.targetfundmanagers.com.
On behalf of the Board
Malcolm Naish
Chairman
11 October 2022
44 Target Healthcare REIT plc
Report of the Audit Committee
Welcome to my first report as the chair
of the Audit Committee. 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.
Vince Niblett
Chair of the Audit Committee
Composition of the Audit Committee
An Audit Committee has been established with written terms of reference which are reviewed at each meeting and which are available on
request. On 14 December 2021, Mr Niblett was appointed as Chair of the Committee. Mr Coull has continued as a valued member of the Audit
Committee, ensuring that the corporate knowledge earned over his eight year tenure as Committee Chair is passed to his successor. 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.
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 47
and 48. In addition, during the year, the Committee kept under review the Investment Manager’s
implementation of a new financial accounting and reporting system, the statutory financial
reporting of each of the Group’s subsidiaries for the year ended 30 June 2021 and the internal
financing structure of the Group, including the settlement of intercompany loans and the payment
of intragroup dividends.
The Directors also reviewed the financial information, both published and considered internally,
in relation to the equity issuance completed in September 2021.
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 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.
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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 being discussed at the Group’s annual two-day strategy meeting.
The Committee has historically appointed 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 has been completed annually, although the scope of work
has been 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, the Committee noted that
the Investment Manager was commissioning an internal controls report over its own processes,
prepared under ISAE 3402 Assurance Reports on Controls at a Service Organization. After careful
consideration, the Committee concluded that the agreed upon procedures to be completed by the
reporting accountant should therefore be focussed on the Investment Manager’s implementation
of a new accounting system, with comfort on other significant controls in place at the Investment
Manager being obtained through review of their ISAE 3402 Report. Although the ISAE 3402 report
at 30 September 2022 had not been formally published by the Investment Manager at the date
of the approval of this Annual Report, the Audit Committee discussed the work conducted by the
Independent Service Auditor to ensure that there were no matters arising of which they should
be aware.
From a review of the risk matrix, the outcome of the procedures undertaken by the reporting
accountant, a discussion in relation to the ISAE 3402 report on the Investment Manager, and
ongoing review of 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.
Consideration of dividend calculations
both in relation to PID/non-PID
payments made by the Company
and other dividends paid internally
within the Group.
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.
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.
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.
Evaluation of reports received from
the Auditor with respect to the annual
financial statements and assessment
of quality of the audit.
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.
In addition, the Committee challenged the Auditors in relation to the accounting treatment of any
one-off accounting matters arising in the year; in particular in relation to the re-tenanting of five of
the Group’s properties and the receipt of a substantial surrender premium.
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 page 47.
46 Target Healthcare REIT plc
Report of the Audit Committee continued
Responsibilities of the Audit Committee How they have been discharged
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.
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’ on the following page.
To conduct the tender process and
make recommendations to the Board
for it to put to the shareholders for their
approval in general meeting, about
the appointment, reappointment and
removal of the external auditor.
The Audit Committee conducted a tender of the Group’s external audit during the year following the
process set out in detail on page 35. In summary, the Audit Committee invited a total of four firms to
submit written tenders, and two firms then presented directly to the Audit Committee. Following the
completion of a detailed scorecard, and taking into consideration the level of audit fees proposed,
the Audit Committee recommended to the Board that Ernst & Young LLP be re-appointed as the
Group’s auditors for the year ending 30 June 2023. The Audit Committee does not anticipate
undertaking a further tender of the Group’s external audit during the forthcoming year.
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 24 and 25.
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 45 in relation to the year ended 30 June 2022, the Investment Manager has engaged an independent service auditor to undertake
a review of its control environment in accordance with International Standard on Assurance Engagements (‘ISAE’) 3402 “Assurance Reports on
Controls at a Service Organization”. The Audit Committee discussed with the independent service auditor the results of the work that they had
completed in relation to the Investment Manager’s ISAE 3402 report being prepared as at 30 September 2022. The Board also commissioned a
separate report by a reporting accountant on the Investment Manager’s implementation of a new accounting system. The Audit Committee’s
review of each discussion/report did not identify any significant issues or concerns.
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.
47Annual Report and Financial Statements 2022
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The Board has reviewed the need for an internal audit function, taking into consideration the internal financial controls systems set out on the
previous page and, in particular, any matters arising in relation to the preparation of the Investment Manager’s ISAE 3402 report and the work
of the reporting accountant. 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.
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, both verbal and written,
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 and challenge 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 2022 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 2022 constitutes the fifth year of her term. Having
considered the effectiveness of the audit and having conducted a tender of audit services to the Group as detailed on page 35, the Audit
Committee has recommended the continuing appointment of EY as the Group’s auditor to the Board, with Matt Price replacing Caroline
Mercer as audit principal for the year ending 30 June 2023. The performance of the Auditor will continue to be reviewed annually taking into
account all relevant guidance and best practice. The Company is in compliance with the requirements of the Statutory Audit Services for
Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014.
This order relates to the frequency and governance of tenders for the appointment of the external auditor and the setting of the policy on the
provision of non-audit services.
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 has also ensured that the provision of non-audit services did not endanger the independence of
any party that the Company intended to invite to participate in the audit tender conducted during the year.
Service provided (inclusive of irrecoverable VAT) Fee (£’000)
Statutory audit of the Company for the year ended 30 June 2022 118
Statutory audit of the Company’s subsidiaries for the year ended 30 June 2022 230
Review of interim financial information for the six months ended 31 December 2021 16
Total (inclusive of irrecoverable VAT) 364
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 2022. 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 2022 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.
48 Target Healthcare REIT plc
Report of the Audit Committee continued
Matter Audit Committee action
Income recognition
Incomplete or inaccurate income recognition could have
an adverse effect on the Group’s net asset value, earnings
per share, its level of dividend cover and compliance with
REIT regulations.
The Audit Committee reviewed the Investment Manager’s processes and controls
around the recording of investment income. It also compared the final level of
income received for the year to forecasts. Particular attention was paid to any
variable income recognised, such as that arising on leases where the rental level
paid may be partially based on the earnings of the underlying tenant operator.
The Audit Committee also considered the basis of calculation of the Group’s
estimated credit losses by reviewing the scenario analysis prepared by the
Investment Manager and ensuring that this was prepared on a basis consistent
with the Directors’ understanding of the financial position of each relevant tenant.
The Committee particularly considered the accounting treatment of a surrender
premium paid by an outgoing tenant as part of an asset management initiative,
including the allocation of the sum received between revenue and capital.
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.
Recognition of performance payments
Incomplete, inaccurate or inappropriately timed
recognition of the further capital payments that may be
payable to the tenants/ vendors of certain of the Group’s
properties should certain contracted performance
conditions be met, in exchange for an increase in the
rent receivable in relation to the relevant property, may
lead to a misstatement of the Group’s Balance Sheet or
Statement of Consolidated Income.
The Audit Committee reviewed the terms of the contracted performance
payments. It was concluded that the appropriate accounting choice remained
to recognise the liability when the contingent payment crystallised, which was
deemed to be the date on which the contracted performance conditions had
been met by the tenant. However, noting that the capital payment would also
increase the rental payments receivable in relation to the relevant property and
that the external valuers would not recognise the resultant increase in the market
value of the relevant property until the capital payment was actually settled
(being the date on which the increased rental income became contractually
committed), it was considered appropriate to also make an equal but opposite
adjustment to the carrying value of the Group’s Investment Property portfolio.
Internal controls
Incomplete design or ineffective operation of internal
controls may result in a loss of the Group’s assets, a
misstatement of the financial statements or a breach
of legal, tax or other regulations.
The Audit Committee reviewed the Group’s internal control environment,
considering its completeness and efficiency and identifying any areas where the
Board, or Committees, did not have direct means of ensuring that the internal
controls in place within the Investment Manager were operating as designed.
As described on page 45, an external Reporting Accountant was appointed
to complete a review of the Investment Manager’s implementation of a new
accounting system, 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 work. The Audit Committee also discussed
the work undertaken in relation to the Investment Manager’s ISAE 3402 Report.
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 2022.
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 63 and the viability statement on pages 34 and 35. The Audit Committee
considered the FCA’s published guidance, along with emerging market practice,
in conducting this assessment.
The Audit Committee noted that the Auditors had not reported any indications of systemic weaknesses in the Group’s internal controls or
financial reporting processes and that no material adjustments had been 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 2022, 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.
Vince Niblett
Chairman of the Audit Committee
11 October 2022
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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. Shareholders
will be provided with an opportunity at the
forthcoming AGM to vote in relation to both
the Company’s policy and this Report.
Alison Fyfe
Chair of the Remuneration Committee
Composition and Role of the Remuneration Committee
The Company has established a Remuneration Committee chaired by Ms Fyfe. The Committee has written terms of reference which are
reviewed at each meeting and which 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 2022 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 out of pocket approved expenses incurred wholly and exclusively in fulfilling their duties in relation to the Group, such as
reasonable travel and associated expenses incurred by the Directors in attending Board and Committee meetings.
The fees for the Directors are determined within the limit set out in the Company’s Articles of Association 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. The Company may periodically choose to
benchmark Directors’ fees with an independent review, to ensure they remain fair and reasonable.
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.
The Remuneration Policy must be approved by shareholders at least every three years or, if earlier, when any changes to the policy are
proposed by the Company.
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. An ordinary resolution for
the approval of the Directors’ Remuneration Policy will be put to shareholders at the forthcoming AGM to be held on 6 December 2022 and, if
approved, it is intended that this policy will continue for the three-year period ending at the AGM in 2025.
50 Target Healthcare REIT plc
Directors’ Remuneration Report continued
Directors’ Fees
The Board considers the level of Directors’ fees at least annually. At the end of the previous 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. As highlighted in
the prior year, the level of fees subsequently recommended by the Remuneration Committee, and approved by the Board, were, in aggregate,
6% lower than the external consultant’s recommendation.
The Remuneration Committee conducted a review of the level of Directors;’ fees at the end of the year ended 30 June 2022, which included:
– consideration of the external consultant’s recommendation in the prior year;
– consideration of the level of inflation for the year ended 30 June 2022;
– an assessment of the increased ongoing workload and responsibilities for the Directors, taking into account increasingly complex and
onerous legal and regulatory requirements, the Company’s subsequent inclusion in the FTSE-250 Index and the increase in the size of the
Group as a result of the significant portfolio acquisition in December 2021, with total assets having increased by 34 per cent over the year;
– consultation with various of the Group’s advisers in relation to their experiences of current market practice; and
– consideration of the level of fees paid by the Group’s peer group;
The Committee concluded that the level of Directors’ fees paid by the Company was currently below that paid by other similar companies.
However, mindful of the current circumstances being faced by the healthcare sector and uncertainty over the general economic environment,
it was considered appropriate that the increase in fees was restricted to a level below the current level of inflation, and consistent with the level
of rental growth on a like-for-like basis witnessed in the Group’s property portfolio for the year ended 30 June 2022. The aggregate level of fees
proposed also remains below the recommendation of the external consultant in the prior year.
It is expected that an external review of the level of the Directors’ remuneration will continue to be sought at least every three years, with the
next external review expected to be conducted at 30 June 2024.
Year ending
30 June 2023
£’s
Year ended
30 June 2022
£’s
Year ended
30 June 2021
£’s
Change
in year ended
30 June 2022
%
Chairman 54,000 50,000 44,000 +13.6
Audit Committee Chair 45,500 44,000 39,000 +12.8
Director 39,000 37,500 32,750 +14.5
The present limit on Directors’ fees is an aggregate of £250,000 per annum. This limit may be amended by changing the Company’s Articles
of Association, or by the passing of an ordinary resolution at a general meeting.
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. No other forms of remuneration or taxable
benefits were paid during the year.
Year ended
30 June 2022
£’s
Change in
year ended
30 June 2022
%
Year ended
30 June 2021
£’s
Change in
year ended
30 June 2021
%
Malcolm Naish (Chairman) 50,000 +13.6 44,000 +0.0
Gordon Coull* 40,651 +4.2 39,000 +0.0
Alison Fyfe 37,500 +14.5 32,750 +600.0
Vince Niblett (appointed 25 August 2021)* 35,738 n/a – n/a
Amanda Thompsell (appointed 1 February 2022) 15,625 n/a – n/a
June Andrews (retired 14 December 2021) 17,067 -47.9 32,750 +0.0
Tom Hutchison (retired 14 December 2021) 17,067 -47.9 32,750 +0.0
Total 213,648 +17.9 181,250 +13.4
* Mr Niblett was appointed as Chair of the Audit Committee, succeeding Mr Coull who was appointed as Senior Independent Director, on 14 December 2021.
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.
Year ended
30 June 2022
£’000
Year ended
30 June 2021
£’000
Change in
year ended
30 June 2022
%
Aggregate Directors’ remuneration 214 181 +17.9
Management fee and other revenue expenses* 13,702 11,130 +23.1
Distributions paid to shareholders in respect of the year 41,928 32,560 +28.8
* 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.
51Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
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 2022 were as follows:
Ordinary shares
30 June 2022
Ordinary shares
30 June 2021
Malcolm Naish 45,001 45,001
Gordon Coull 35,454 35,454
Alison Fyfe 10,000 –
Vince Niblett (appointed 25 August 2021) – n/a
Amanda Thompsell (appointed 1 February 2022) – n/a
June Andrews (retired 14 December 2021) n/a –
Tom Hutchison (retired 14 December 2021) n/a 70,000
Total 90,455 150,455
There have not been any changes in the Directors’ interests between 30 June 2022 and 11 October 2022. Neither Mr Niblett nor Dr Thompsell
held any ordinary shares in the Company at the date of their respective appointments. No Director had an interest in any contracts with the
Company during the year or subsequently.
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 30.
The graph below compares, from launch to 30 June 2022, 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)
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 14 December 2021, shareholders approved the Directors’ Remuneration Report in respect of the
year ended 30 June 2021. 99.1 per cent of the votes cast were in favour of the resolution and votes withheld represented less than 1.5 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 6 December 2022.
On behalf of the Board
Alison Fyfe
Director
11 October 2022
30/6/137/3/13 30/6/14 30/6/15 30/6/16 30/6/17 30/6/18 30/6/19 30/6/21
30/6/22
30/6/20
210
200
160
170
180
150
190
140
130
120
70
80
90
100
110
FTSE EPRA Nareit UK Index Total Return Share Price Total Return Sources: EPRA, Target Fund Managers Limited
52 Target Healthcare REIT plc
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 2022 and of the Group’s profit for
the year then ended;
– the Group financial statements have been properly prepared in accordance with UK adopted international accounting standards;
– 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 2022 which comprise:
Group Parent Company
Consolidated Statement of Comprehensive Income for the year
ended 30 June 2022
Statement of Financial Position as at 30 June 2022
Consolidated Statement of Financial Position as at 30 June 2022 Statement of Changes in Equity for the year ended 30 June 2022
Consolidated Statement of Changes in Equity for the year ended
30 June 2022
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 2022
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 UK adopted
international accounting standards. 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” (United
Kingdom Generally Accepted Accounting Practice).
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 believe
that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Group and Parent Company 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.
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.
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:
– Confirming our understanding of the Group and Parent Company’s going concern assessment process and engaged with the Directors
and the Company Secretary to determine if all key factors have been included in their assessment.
– Inspecting the Directors’ assessment of going concern, including the revenue and expenses forecast for the period to 31 December
2023 which is at least twelve months from the date the financial statements have been authorised for issue. In preparing the revenue and
expenses forecast, the Group and Parent Company have concluded that they are able to continue to meet their costs as they fall due.
– In respect of the continuation vote to be held at the AGM in 2022, reviewing analysis of the shareholder base and voting results of previous
AGMs to establish voting patterns; and obtaining views of the Group’s brokers on their assessment of expected voting intentions, to
ascertain the likely outcome of the vote.
– Reviewing the factors and assumptions, including the impact of external market factors, 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 and Parent Company.
– In relation to the Group’s borrowing arrangements, inspecting 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 reperformed reverse stress testing prepared for the assessment in order to identify what factors would lead
to the Group breaching the financial covenants.
– Considering the mitigating factors included in the revenue forecasts and covenant calculations that are within the control of the Group and
Parent Company.
– Reviewing the Group’s going concern disclosures included in the annual report in order to assess that the disclosures were appropriate and
in conformity with UK adopted international accounting standards.
53Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
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 2023, which is at least twelve months from the date the financial statements have been authorised for issue.
In relation to the Group’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.
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 – Incorrect valuation or ownership of investment properties
– Incomplete or inaccurate recognition of rental income including accounting for fixed rental uplifts
and lease incentives
Materiality – Overall Group materiality of £6.99 million which represents 1% of Group net assets.
An overview of the scope of the Parent Company and Group audits
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for
each company within the Group and Parent Company. This enables us to form an opinion on the Group consolidated and Parent Company
financial statements. We take into account size, the risk profile, the organisation of the Company and effectiveness of controls, including
controls and changes in the business environment when assessing the level of work to be performed. All audit work performed for the
purposes of the audit was undertaken by the Group audit team which includes our real estate valuation specialists.
Climate change
There has been increasing interest from stakeholders as to how climate change will impact companies. The Group and Parent Company has
determined that the impact of climate change could affect the Group’s investments and their valuations, and potentially shareholder returns.
This is explained in the principal and emerging risks section on page 24, which forms part of the “Other information,” rather than the audited
financial statements. Our procedures on these disclosures therefore consisted solely of considering whether they are materially inconsistent
with the financial statements or our knowledge obtained in the course of the audit or otherwise appear to be materially misstated.
Our audit effort in considering climate change was focused on the adequacy of the Group and Parent Company’s disclosures in the
financial statements as set out in Note 1(a) and conclusion that there was no further impact of climate change to be taken into account as
the investment properties are valued at fair value based on open market valuations as described in Note 1(h). The open market valuation
assessment includes consideration of environmental matters and the condition of each property with detail on the fair value of properties
provided within the notes to the financial statements. We also challenged the Directors’ considerations of climate change in their assessment
of viability and associated disclosures.
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.
54 Target Healthcare REIT plc
Independent Auditor’s Report
to the members of Target Healthcare REIT plc continued
Risk Our response to the risk
Key observations communicated
to the Audit Committee
Incorrect valuation or ownership of investment
properties
(Refer to Report of the Audit Committee (page 47);
Accounting policies (pages 64 and 65); and Notes
9 and 10 to the Consolidated Financial Statements
(pages 70 to 72)).
At 30 June 2022, the Group’s investment portfolio
consists of UK healthcare properties, with a
market value of £911.60m (2021: £677.53m) and
carrying value of £857.69m (2021: £631.16m),
which is net of a deduction of £56.71m
(2021: £47.92m) to account for lease incentives
and guaranteed rent reviews and an addition for
accrued performance payments of £2.80m
(2021: £1.55m).
The valuation of the properties held in the
investment portfolio, and unrealised gains/(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.
The valuation of investment property requires
significant judgement and estimates by the
Investment Manager 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 Statement of Financial
Position and in the 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 rental uplifts.
Failure to maintain proper legal title of the
Group’s Investments could result in assets being
incorrectly recognised within the Statement of
Financial Position.
The valuation of investment properties and the
resultant impact on unrealised gains/(losses) is
the area requiring the most significant judgement
and estimation in the preparation of the financial
statements and has been classified as an area of
fraud risk as highlighted on page 57.
We performed the following procedures:
We obtained an understanding of the processes and
controls surrounding investment valuation 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:
– Evaluating the competency, capability, objectivity and
work performed by Colliers;
– Reviewing the assumptions used by Colliers in
undertaking their valuation and an assessment
of the valuation methodology adopted;
– Holding 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;
– Reviewing a sample of the individual property
valuations, as at 30 June 2022 and examining key
valuation inputs;
– Analysing key changes in the property valuation as a
whole including a review of the reasonableness of the
income yields for the properties; and
– Assessing the impact of COVID-19 through discussions
with the Investment Manager and reviewing the impact
of the expected credit loss calculations and memo on
a sample of property valuations.
We reviewed the accounting policy and recalculated the
adjustments made to the Colliers’ fair value in respect of
lease incentives and guaranteed rent reviews, 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 legal title to investment properties
and development sites held as at 30 June 2022.
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.
The results of our
procedures identified no
material misstatement
in relation to the risk
of incorrect valuation,
calculation of unrealised
gains/(losses) or ownership
of investment properties.
55Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
Risk Our response to the risk
Key observations communicated
to the Audit Committee
Incomplete or inaccurate recognition of rental
income including accounting for rental uplifts
and lease incentives
(Refer to Report of the Audit Committee (page 48)
and Accounting Policies (pages 63 and 64)).
During the year ended 30 June 2022, £59.01m
(2021: £49.91m) has been recognised by the
Group as rental income, £4.67m (2021: £nil) has
been recognised as other rental income and
£0.16m (2021: £0.07m) has been recognised as
other income. Of this £49.77m (2021: £41.24m)
has been recorded as revenue in the Consolidated
Statement of Comprehensive Income and
£14.09m (2021: £8.74m) as capital relating to
guaranteed rent review uplifts which are being
spread over the applicable lease term and other
capital payments relating to lease events.
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 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.
There is a risk of incomplete or inaccurate
recognition of rental income through the failure
to recognise the proper entitlements or applying
the appropriate accounting treatment.
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, including events
relating to retenanting, 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 100% of the rental
income recognised.
We reperformed the calculations of the rental adjustments
required for rental uplifts and lease incentives under
IFRS 16 for all tenants and tested the allocation of returns
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.
We have recalculated the contingent rent received and
verified that it has been correctly recognised in the period.
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 rental uplifts
and lease incentives.
There have been no changes to our key audit matters from the prior year.
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 £6.99 million (2021: £5.65 million), which is 1% (2021: 1%) of 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 £6.99 million (2021: £5.45 million), which is 1% (2021: 1%) of net assets. We believe
that net assets provides us with materiality aligned to a key measurement of the Parent Company’s performance.
Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that
performance materiality was 75% (2021: 75%) of our planning materiality, namely £5.24 million (2021: £4.24 million). 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.
56 Target Healthcare REIT plc
Independent Auditor’s Report
to the members of Target Healthcare REIT plc continued
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 £0.35 million (2021:
£0.28 million), 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 this gives rise to 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
– the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
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.
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 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.
Corporate Governance Statement
We have reviewed 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 by the Listing Rules.
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 34;
– 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 34 and 35;
– Director’s statement on whether it has a reasonable expectation that the Group will be able to continue in operation and meets its liabilities
set out on page 34;
– Directors’ statement on fair, balanced and understandable set out on page 32;
– Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 25;
– The section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on
page 46 and 47; and;
– The section describing the work of the audit committee set out on pages 44 to 48.
57Annual Report and Financial Statements 2022
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Responsibilities of directors
As explained more fully in the directors’ responsibilities statement set out on page 39, 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.
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 UK adopted international accounting standards for the Group, FRS 101 “Reduced Disclosure Framework” for the Parent
Company, 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 and Parent Company’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 rental uplifts and lease incentives; and incorrect valuation and the
calculation of unrealised gains/(losses) of investment properties. 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
– Following the recommendation from the Audit Committee we were appointed as auditors of 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 three
years, covering the years ended 30 June 2020 to 30 June 2022.
– 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 Group’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 Group and the Group’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
11 October 2022
58 Target Healthcare REIT plc
Consolidated Statement of Comprehensive Income
For the year ended 30 June 2022
Year ended 30 June 2022 Year ended 30 June 2021
Notes
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
Rental income 48 ,8 07 10,21 5 5 9,0 22 41 ,1 68 8 ,7 39 49,9 07
Other rental income 796 3, 87 7 4 ,673 – – –
Other income 164 – 164 73 – 73
Total revenue 49,767 14,0 92 63, 859 41 , 241 8 ,7 39 4 9,9 8 0
Gains on revaluation of investment
properties
9 – 5 ,553 5, 553 – 9,536 9,536
Gains on investment properties realised
9 – – – – 1 ,30 6 1 ,306
Losses on revaluation of properties
held for sale
10 – (7 ) (7 ) – (92 ) (92 )
Total income 49,767 19, 63 8 69 ,405 41 , 241 1 9,4 8 9 60, 730
Expenditure
Investment management fee
2 (7, 3 07 ) – ( 7, 3 0 7 ) (5,796 ) – (5 ,796 )
Credit loss allowance and bad debts
3 (3, 232 ) – (3,232 ) (2,717 ) – (2,717 )
Other expenses
3 (3,163 ) – (3, 163 ) (2,617 ) – (2,617 )
Total expenditure (13 ,702 ) – (13,702 ) (1 1 ,130 ) – (1 1,1 30 )
Profit before finance costs
and taxation 36 ,065 19, 63 8 55 ,703 30, 111 19,4 89 49, 60 0
Net finance costs
Interest receivable
4 71 – 71 39 – 39
Interest payable and similar charges
5 (6,6 71 ) – (6,671 ) (4, 85 0 ) (91 3 ) (5,763 )
Profit before taxation 2 9,4 65 1 9,63 8 4 9, 103 25, 300 18 , 5 76 43,87 6
Taxation
6 (6 ) – (6 ) 8 – 8
Profit for the year 29, 45 9 19,6 38 49,097 25,308 18 , 5 76 43,884
Other comprehensive income:
Items that are or may be reclassified
subsequently to profit or loss
Movement in fair value of interest rate
swaps
14 – 2 ,03 3 2 ,033 – 298 298
Reclassification to profit and loss on
discontinuation of interest rate swaps
14 – – – – 180 180
Total comprehensive income for
the year 2 9,4 59 21 ,671 51 , 13 0 25,308 19,0 5 4 4 4, 362
Earnings per share (pence)
8 4.92 3. 28 8. 20 5 .32 3 .91 9. 23
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.
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Consolidated Statement of Financial Position
As at 30 June 2022
Notes
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Non-current assets
Investment properties
9 8 5 7, 6 9 1 6 31 ,1 5 6
Trade and other receivables
11 63 ,651 5 4,58 0
Interest rate swap
14 2, 284 251
Current assets
Trade and other receivables
11 5 ,5 49 3 ,9 8 1
Cash and cash equivalents
13 34,4 83 2 1 ,10 6
Properties held for sale
10 – 7, 3 2 0
Total assets 963 ,658 71 8, 39 4
Non-current liabilities
Bank loans
14 (231 , 38 3 ) (1 2 7,9 0 4 )
Trade and other payables
15 (7, 1 4 5 ) (6 ,8 40 )
(238 ,528 ) (1 3 4 , 74 4 )
Current liabilities
Trade and other payables
15 (26 , 363 ) (18,4 65 )
Total liabilities (264,8 91 ) (1 53,209 )
Net assets 698,767 565,185
Share capital and reserves
Share capital
16 6 , 202 5,1 15
Share premium 256 ,633 1 35 , 2 28
Merger reserve 4 7, 7 5 1 4 7, 7 5 1
Distributable reserve 226 ,461 265 ,16 4
Hedging reserve 2, 284 251
Capital reserve 83,750 64,1 1 2
Revenue reserve 75,68 6 47, 5 6 4
Equity shareholders’ funds 698,767 565,185
Net asset value per ordinary share (pence)
8 112 .7 1 10. 5
Company number: 11990238.
The financial statements on pages 58 to 78 were approved by the Board of Directors and authorised for issue on 11 October 2022 and were
signed on its behalf by:
Malcolm Naish
Chairman
The accompanying notes are an integral part of these financial statements.
60 Target Healthcare REIT plc
Consolidated Statement of Changes in Equity
For the year ended 30 June 2022
Notes
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Distributable
reserve
£’000
Hedging
reserve
£’000
Capital
reserve
£’000
Revenue
reserve
£’000
Total
£’000
At 30 June 2021 5,115 1 35, 228 4 7, 7 5 1 2 65, 16 4 251 64,1 12 47, 5 6 4 565, 185
Total comprehensive income
for the year – – – – 2 ,033 19, 63 8 29, 45 9 51 , 1 30
Transactions with owners
recognised in equity:
Dividends paid
7 – – – (3 8, 703 ) – – (1 , 337 ) (40,040 )
Issue of ordinary shares
16 1 ,087 123,913 – – – – – 125,000
Expenses of issue
16 – (2 ,50 8 ) – – – – – (2, 50 8 )
At 30 June 2022 6, 202 25 6,633 4 7, 7 5 1 226 ,461 2 , 284 83,750 75,6 86 698 ,767
Notes
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Distributable
reserve
£’000
Hedging
reserve
£’000
Capital
reserve
£’000
Revenue
reserve
£’000
Total
£’000
At 30 June 2020 4,5 75 77 ,452 4 7, 7 5 1 29 6, 7 70 (227 ) 45,536 22, 256 49 4,1 1 3
Total comprehensive income
for the year – – – – 47 8 1 8 , 5 76 25,308 4 4,3 62
Transactions with owners recognised
in equity:
Dividends paid
7 – – – (3 1,606 ) – – – (31,606 )
Issue of ordinary shares
16 540 59, 4 60 – – – – – 60, 000
Expenses of issue
16 – (1,6 84 ) – – – – – (1 ,6 84 )
At 30 June 2021 5,1 15 1 35 , 2 28 4 7, 7 5 1 26 5 ,16 4 2 51 6 4,11 2
The accompanying notes are an integral part of these financial statements.
For the year ended 30 June 2021
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Consolidated Statement of Cash Flows
For the year ended 30 June 2022
Notes
Year ended
30 June 2022
£’000
Year ended
30 June 2021
£’000
Cash flows from operating activities
Profit before tax 49, 1 03 43,87 6
Adjustments for:
Interest receivable (71 ) (39 )
Interest payable 6,671 5 , 76 3
Revaluation gains on investment properties and movements in lease incentives,
net of acquisition costs written off
9 (1 9,6 4 5 ) (19,581 )
Revaluation losses on properties held for sale
10 7 92
Increase in performance payments
9 (1 , 250 ) (1,550 )
Increase in trade and other receivables (3,768 ) (1, 232 )
Increase in trade and other payables 4,59 0 1 ,8 59
Interest paid (5 ,31 0 ) (4 , 26 6 )
Interest received 71 39
Tax paid (6 ) (5 )
(5, 245 ) (4, 232 )
Net cash inflow from operating activities 30, 392 2 4,956
Cash flows from investing activities
Purchase of investment properties and properties held for sale, including acquisition costs (206,993 ) (51, 40 0 )
Disposal of investment properties and properties held for sale, net of lease incentives 4,36 0 7, 8 2 5
Net cash outflow from investing activities (202 ,633 ) (43 , 5 75 )
Cash flows from financing activities
Issue of ordinary share capital
16 125,000 60, 000
Expenses of issue of ordinary share capital
16 (2 ,5 08 ) (1,6 84 )
Drawdown of bank loan facilities
14 222 ,000 15 2,000
Repayment of bank loan facilities
14 (1 1 7, 2 5 0 ) (17 4, 0 00 )
Expenses of arrangement of bank loan facilities
14 (1 ,839 ) (1 ,538 )
Dividends paid (39,785 ) (31 , 493 )
Net cash inflow from financing activities 185,618 3 , 28 5
Net increase/(decrease) in cash and cash equivalents 13 ,37 7 (15 ,3 34 )
Opening cash and cash equivalents 21 , 10 6 36 ,4 40
Closing cash and cash equivalents
13 34,4 83 2 1 ,10 6
Transactions which do not require the use of cash
Movement in fixed or guaranteed rent reviews and lease incentives 12 , 148 9,65 6
Fixed or guaranteed rent reviews derecognised on disposal or re-tenanting (3, 362 ) (1 , 556 )
Total 8,78 6 8 ,10 0
The accompanying notes are an integral part of these financial statements.
62 Target Healthcare REIT plc
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 UK-adopted International Financial Reporting
Standards (‘IFRS’), 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 July 2022, 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 and there are no significant new amendments to the
standards that have become effective in the current year that 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, including an amendment to IFRS 9: Financial Instruments – Fees in the ‘10 per cent’ Test for Derecognition of
Financial Liabilities which clarifies the fees a company includes when assessing whether the terms of a new or modified financial liability are
substantially different from the terms of the original financial liability.
On 12 February 2021, the IASB issued amendments to IAS 1: Presentation of Financial Statements. The amendments aim to help entities provide
accounting policy disclosures that are more useful by replacing the requirement for entities to disclose their ‘significant’ accounting policies with
a requirement to disclose their ‘material’ accounting policies and adding guidance on how entities apply the concept of materiality in making
decisions about accounting policy disclosures. The amendment is effective for annual periods beginning on or after 1 January 2023.
On 12 February 2021, the IASB published ‘Definition of Accounting Estimates (Amendments to IAS 8)’ to help entities to distinguish
between accounting policies, which must be applied retrospectively, and accounting estimates, which are accounted for prospectively.
The amendments are effective for annual periods beginning on or after 1 January 2023 and changes in accounting policies and changes
in accounting estimates that occur on or after the start of that period.
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 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 accrued rent and trade receivables
The Group uses a provision matrix to calculate expected credit losses for accrued rent 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.
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Financial Statements Additional InformationCorporate GovernanceStrategic Report
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 relating to economic conditions in which the Group is operating, including COVID-19 and market
uncertainty and rising costs, 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 2022. 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 6.9 years at 30 June 2022, an earliest repayment date of November 2024 and a fixed interest rate
on £180 million of the Group’s borrowings;
– The Group issued further ordinary shares in September 2021, raising gross proceeds of £125 million; and
– That the Directors currently have no reason to believe that the continuation vote required to be proposed under the Company’s Articles
at the forthcoming AGM will not be passed.
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 34 and 35). 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 be able 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 to
31 December 2023, which is at least 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 2022.
In preparing the Consolidated Financial Statements, the Directors have considered the impact of climate change risk as an emerging risk as
set out on page 24. In line with IFRS, investment properties are valued at fair value based on open market valuations as described in Notes 1(h)
and 9. The assessment of the open market valuation includes consideration of environmental matters and the condition of each property.
The investment properties continue to be monitored by the Investment Manager and key considerations include EPC ratings as summarised
at a portfolio level on page 2 and their impact on the properties’ forecast compliance with forthcoming minimum energy efficiency standards.
Having assessed the impact of climate change on the Group, the Directors concluded that it is not expected to have a significant impact on
the Group’s going concern or viability assessment as described on pages 34 and 35.
(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 2022.
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.
64 Target Healthcare REIT plc
Notes to the Consolidated Financial Statements continued
1. Accounting policies continued
(c) Revenue recognition continued
Other Rental Income
Surrender premiums receivable are recognised on the completion of a deed of surrender and are recognised in revenue where the receipt is
in compensation for a reduction in rent or the granting of a rent free period to an incoming tenant, and in capital when the premium received
is in compensation for a reduction in the capital value of the relevant property as a result of the tenant’s surrender of the lease.
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.
(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.
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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.
(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.
66 Target Healthcare REIT plc
Notes to the Consolidated Financial Statements continued
1. Accounting policies continued
(n) Reserves continued
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 revenue reserve in the Company Financial Statements 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.
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
Year ended
30 June 2022
£’000
Year ended
30 June 2021
£’000
Management fee 7,307 5,796
Total 7,307 5,796
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
Management fee
percentage
Up to and including £500 million 1.05
Above £500 million and up to and including £750 million 0.95
Above £750 million and up to and including £1 billion 0.85
Above £1 billion and up to and including £1.5 billion 0.75
Above £1.5 billion 0.65
The Investment Manager is entitled to an additional fee of £126,000 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.
67Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
3. Other expenses
Year ended
30 June 2022
£’000
Year ended
30 June 2021
£’000
Credit loss allowance 2,865 1,697
Bad debts written off 367 1,020
Total credit loss allowance and bad debts 3,232 2,717
Valuation and other professional fees 1,143 1,008
Auditor’s remuneration for:
– statutory audit of the Company 118 104
– statutory audit of the Company’s subsidiaries 230 184
– review of interim financial information 16 15
Other taxation compliance and advisory* 361 436
Public relations and marketing 327 213
Directors’ fees 214 181
Secretarial and administration fees 177 172
Direct property costs 160 32
Printing, postage and website 111 92
Listing and Registrar fees 102 78
Other 204 102
Total other expenses 3,163 2,617
* The other taxation compliance and advisory fees were all paid to parties other than the Company’s Auditor.
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
Year ended
30 June 2022
£’000
Year ended
30 June 2021
£’000
Deposit interest 71 39
Total 71 39
5. Interest payable and similar charges
Year ended
30 June 2022
£’000
Year ended
30 June 2021
£’000
Interest paid on bank loans 6,103 4,276
Amortisation of loan costs 568 574
Cost of early redemption – 913
Total 6,671 5,763
6. Taxation
Year ended
30 June 2022
£’000
Year ended
30 June 2021
£’000
Current tax 6 –
Adjustment to tax charge for prior years – (8)
Total tax charge/(credit) 6 (8)
68 Target Healthcare REIT plc
Notes to the Consolidated Financial Statements continued
6. Taxation continued
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:
Year ended
30 June 2022
£’000
Year ended
30 June 2021
£’000
Profit before tax 49,103 43,876
Tax at 19.0% (2021: 19.0%) 9,330 8,336
Effects of:
REIT exempt profits (6,671) (5,468)
REIT exempt gains (1,642) (1,920)
Capital allowances (1,642) (1,343)
Excess management expenses carried forward 624 212
Expenses not deductible for tax purposes 7 183
Adjustment to tax charge for prior years – (8)
Total tax charge/(credit) 6 (8)
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 £10.6 million at 30 June 2022 (2021: £6.3 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.
7. Dividends
Amounts paid as distributions to equity holders during the year to 30 June 2022.
Dividend rate
(pence per
share)
Year ended
30 June 2022
£’000
Fourth interim dividend for the year ended 30 June 2021 1.68 8,594
First interim dividend for the year ended 30 June 2022 1.69 10,482
Second interim dividend for the year ended 30 June 2022 1.69 10,482
Third interim dividend for the year ended 30 June 2022 1.69 10,482
Total 6.75 40,040
Amounts paid as distributions to equity holders during the year to 30 June 2021.
Dividend rate
(pence per
share)
Year ended
30 June 2021
£’000
Fourth interim dividend for the year ended 30 June 2020 1.67 7,64 0
First interim dividend for the year ended 30 June 2021 1.68 7,686
Second interim dividend for the year ended 30 June 2021 1.68 7,686
Third interim dividend for the year ended 30 June 2021 1.68 8,594
Total 6.71 31,606
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 2022, of 1.69 pence per share, was paid on 26 August 2022 to shareholders
on the register on 12 August 2022 and amounted to £10,482,000. 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
Year ended 30 June 2022 Year ended 30 June 2021
£’000 Pence per share £’000 Pence per share
Revenue earnings 29,459 4.92 25,308 5.32
Capital earnings 19,638 3.28 18,576 3.91
Total earnings 49,097 8.20 43,884 9.23
Average number of shares in issue 599,093,808 475,406,929
There were no dilutive shares or potentially dilutive shares in issue.
69Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
EPRA is an industry body which issues best practice reporting guidelines for financial disclosures by public real estate 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. Other EPRA measures are included in the EPRA Performance Measures on pages 96 and 97.
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:
Year ended
30 June 2022
£’000
Year ended
30 June 2021
£’000
Earnings per IFRS Consolidated Statement of Comprehensive Income 49,097 43,884
Adjusted for gains on investment properties realised – (1,306)
Adjusted for revaluations of investment properties (5,553) (9,536)
Adjusted for revaluations of properties held for sale 7 92
Adjusted for other capital items (3,877) 913
EPRA earnings 39,674 34,047
Adjusted for rental income arising from recognising guaranteed rent review uplifts (10,215) (8,739)
Adjusted for development interest under forward fund agreements 783 647
Group specific adjusted EPRA earnings 30,242 25,955
Earnings per share (‘EPS’) (pence per share)
EPS per IFRS Consolidated Statement of Comprehensive Income 8.20 9.23
EPRA EPS 6.62 7.16
Group specific adjusted EPRA EPS 5.05 5.46
Net Asset Value per share
The Group’s Net Asset Value per ordinary share of 112.7 pence (2021: 110.5 pence) is based on equity shareholders’ funds of £698,767,000
(2021: £565,185,000) and on 620,237,346 (2021: 511,541,694) ordinary shares, being the number of shares in issue at the year-end.
The EPRA best practice recommendations include a 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 2022, 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 facilities where the fair value is estimated to be lower than the nominal value. See Note 14 for further details
on the Group’s loan facilities.
2022
EPRA NRV
£’000
2022
EPRA NTA
£’000
2022
EPRA NDV
£’000
2021
EPRA NRV
£’000
2021
EPR A NTA
£’000
2021
EPRA NDV
£’000
IFRS NAV per financial statements 698,767 698,767 698,767 565,185 565,185 565,185
Fair value of interest rate swap (2,284) (2,284) – (251) (251) –
Fair value of loans – – 22,257 – – (1,389)
Estimated purchasers’ costs 60,225 – – 44,696 – –
EPRA net assets 756,708 696,483 721,024 609,630 564,934 563,796
EPRA net assets (pence per share) 122.0 112.3 116.2 119.2 110.4 110.2
70 Target Healthcare REIT plc
Notes to the Consolidated Financial Statements continued
9. Investment properties
Freehold and leasehold properties
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Opening market value 677,525 610,084
Opening fixed or guaranteed rent reviews and lease incentives (47,919) (39,998)
Performance payments 1,550 –
Opening carrying value 631,156 570,086
Disposals – proceeds – (7,616)
– gain on sale – 2,336
Purchases 199,869 52,295
Transfer from properties held for sale 6,830 –
Acquisition costs capitalised 9,671 2,264
Acquisition costs written off (9,671) (2,264)
Unrealised gain realised during the year – (1,030)
Revaluation movement – gains 43,234 26,565
Revaluation movement – losses (15,862) (5,109)
Movement in market value 234,071 67,441
Fixed or guaranteed rent reviews and lease incentives derecognised on disposal or re-tenanting 3,362 1,735
Movement in fixed or guaranteed rent reviews and lease incentives (12,148) (9,656)
Movement in performance payments 1,250 1,550
Movement in carrying value 226,535 61,070
Closing market value 911,596 677, 525
Closing fixed or guaranteed rent reviews and lease incentives (56,705) (47,919)
Closing performance payments (see Note 19) 2,800 1,550
Closing carrying value 857,691 631,156
Changes in the valuation of investment properties
Year ended
30 June 2022
£’000
Year ended
30 June 2021
£’000
Gain on sale of investment properties – 2,336
Unrealised gain realised during the year – (1,030)
Gains on sale of investment properties realised – 1,306
Revaluation movement 27,372 21,456
Acquisition costs written off (9,671) (2,264)
Movement in lease incentives (1,933) (917)
Movement in fixed or guaranteed rent reviews (10,215) (8,739)
Gains on revaluation of investment properties 5,553 10,842
The investment properties can be analysed as follows:
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Standing assets 892,336 655,175
Developments under forward fund agreements 19,260 22,350
Closing market value 911,596 677, 525
The properties were valued at £911,596,000 (2021: £677,525,000) 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 2022) 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 £857,691,000 (2021: £631,156,000).
The adjustment consisted of £48,802,000 (2021: £41,949,000) relating to fixed or guaranteed rent reviews and £7,903,000 (2021: £5,970,000)
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). An adjustment
is also made to reflect the amount by which the portfolio value is expected to increase if the performance payments recognised in ‘trade and
other payables’ are paid and the passing rent at the relevant property increased accordingly (see Notes 15 and 19). The total purchases in the
year to 30 June 2022, inclusive of the performance payments recognised, were £201,119,000 (2021: £53,845,000).
71Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
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’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.
The real estate investment and occupier markets are currently in a state of transition as they begin to align themselves with the sustainable
development goals of government and the new generation of real estate users. Colliers are mindful of the potential impacts ESG may have on
capital and rental valuations and have considered the guidance provided by the RICS and VPGA 8 of the Red Book. Specific climate-related
risks, such as a reasonably foreseeable increase in the risk of site or coastal flooding, are reflected in the property valuations. However, Colliers
have not undertaken sustainability audits and are not qualified to do so as valuers. Therefore the external valuations only explicitly reflect
immediate sustainability/resilience capital costs where technical information relating to the same has been made available, namely in respect
of upgrading the properties to meet Minimum Energy Efficiency Standard regulations and flood prevention.
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.
In determining what level of the fair value hierarchy to classify the Group’s investments within, the Directors have considered the content and
conclusion of the position paper on IFRS 13 prepared by the European Public Real Estate Association (‘EPRA’), the representative body of the
publicly listed real estate industry in Europe. This paper concludes that, even in the most transparent and liquid markets, it is likely that valuers
of investment property will use one or more significant unobservable inputs or make at least one significant adjustment to an observable
input, resulting in the vast majority of investment properties being classified as level 3.
Observable market data is considered to be that which is readily available, regularly distributed or updated, reliable and verifiable, not
proprietary, and provided by independent sources that are actively involved in the relevant market. In arriving at the valuation Colliers make
adjustments to observable data of similar properties and transactions to determine the fair value of a property and this involves the use of
considerable judgement. Considering the Group’s specific valuation process, industry guidance, and the level of judgement required in the
valuation process, the Directors believe it appropriate to classify the Group’s investment properties within level 3 of the fair value hierarchy.
The Group’s investment properties, which are all care homes, are considered to be a single class of assets. The weighted average net initial yield (‘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 £9,116,000 (2021: £6,775,000);
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 £40,729,000 (2021: £30,086,000),
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 £37,388,000 (2021: £27,656,000) and reduce the Group’s income.
10. Properties held for sale
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Opening fair value 7,320 7,50 0
Purchases – 300
Disposals – proceeds (483) (388)
– gain on sale 122 34
Unrealised gain realised during the period (129) (126)
Transfer to investment properties (6,830) –
Closing fair value – 7,320
72 Target Healthcare REIT plc
Notes to the Consolidated Financial Statements continued
10. Properties held for sale continued
The properties held for sale were valued 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. Certain of the apartments are being rented on a short-term basis whilst awaiting sale.
As the apartments have been held for a period of more than twelve months since initial acquisition, they have been reclassified as investment
properties and transferred at their fair value at 30 June 2022. However, there is no change to the Group’s commercial intention in relation to
these apartments which is to sell the leasehold on the individual apartments in the short to medium term.
11. Trade and other receivables
Non-current trade and other receivables
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Fixed rent reviews 48,802 41,949
Rental deposits held in escrow for tenants 7,145 6,840
Lease incentives 7,704 5,791
Total 63,651 54,580
Current trade and other receivables
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Lease incentives 199 179
VAT recoverable 1,387 732
Accrued income – rent receivable 906 955
Accrued development interest under forward fund agreements 452 739
Other debtors and prepayments 2,605 1,376
Total 5,549 3,981
At the year-end, trade and other receivables include a fixed rent review debtor of £48,802,000 (2021: £41,949,000) which represents the effect
of recognising guaranteed rental uplifts on a straight line basis over the lease term and £7,903,000 (2021: £5,970,000) of accrued income
relating to the recognition of rental income over rent free periods subsequently amortised over the life of the lease.
12. Investment in subsidiary undertakings
The Group included 57 subsidiary companies as at 30 June 2022 (30 June 2021: 50). 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 five new subsidiaries, THR Number 41 Limited, THR Number 42 Limited, THR Number 43 plc,
THR Number 45 Limited and THR Number 46 Limited. The Group also acquired two new companies which have been renamed THR
Number 47 Limited and THR Number 48 Limited. The Group includes eight companies which were acquired as part of previous corporate
acquisitions and which, having remained dormant throughout the year, have been placed into liquidation.
13. Cash and cash equivalents
All cash balances at the year-end were held in cash, current accounts or deposit accounts.
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Cash at bank and in hand 34,020 19,330
Short-term deposits 463 1,776
Total 34,483 21,106
14. Bank loans
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Principal amount outstanding 234,750 130,000
Set-up costs (4,315) (2,476)
Amortisation of set-up costs 948 380
Total 231,383 127,904
73Annual Report and Financial Statements 2022
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In November 2020, the Group entered into a £70,000,000 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 £50,000,000 of the facility and 2.33 per cent
per annum on the remaining £20,000,000 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 £20,000,000 of any undrawn element of the facility, reducing to 1.05 per cent per annum thereafter. As at
30 June 2022, the Group had drawn £50,000,000 under this facility (2021: £30,000,000).
In November 2020, the Group entered into a £100,000,000 revolving credit facility with HSBC Bank plc (‘HSBC’) which is repayable in
November 2024, with the option of a one-year extension 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. As at 30 June
2022, the Group had drawn £34,750,000 under this facility (2021: £50,000,000).
In January 2020, the Group entered into a £50,000,000 committed term loan facility with Phoenix Group which is repayable on 12 January
2032. During the period, the Group entered into further committed term loan facilities of £37,250,000, also repayable on 12 January 2032,
and of £62,750,000, which is repayable on 12 January 2037. Interest accrues on these three loans at aggregate annual fixed rates of interest of
3.28 per cent, 3.13 per cent and 3.14 per cent, respectively and is payable quarterly. As at 30 June 2022, the Group had drawn £150,000,000
under these facilities (2021: £50,000,000).
The following interest rate swap was in place during the year ended 30 June 2022 to hedge the £30,000,000 RBS committed term loan:
Notional Value Starting Date Ending Date Interest paid Interest received Counterparty
30,000,000 5 November 2020 5 November 2025 0.30% Daily compounded SONIA (floor at -0.08%) RBS
Inclusive of all interest rate swaps, the interest rate on £180,000,000 of the Group’s borrowings is fixed, including the amortisation of
arrangement costs, at an all-in rate of 3.22 per cent per annum until at least 5 November 2025. The remaining £140,000,000 of debt, of which
£54,750,000 was drawn at 30 June 2022, would, if fully drawn, carry interest at a variable rate equal to SONIA plus a weighted average lending
margin, including the amortisation of arrangement costs, of 2.44 per cent per annum.
The fair value of the interest rate swap at 30 June 2022 was an aggregate asset of £2,284,000 (2021: £251,000) 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).
At 30 June 2022, the nominal value of the Group’s loans equated to £234,750,000 (2021: £130,000,000). Excluding the interest rate swap
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 2022, totalled, in aggregate, £212,493,000 (2021: £131,389,000). The payment required to
redeem the loans in full, incorporating the terms of the Spens clause in relation to the Phoenix Group facilities, would have been £239,728,000
(2021: £139,748,000). 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 five subsidiaries. The Phoenix Group loans of £50,000,000 and £37,250,000 are 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 eight
subsidiaries. The Phoenix Group loan of £62,750,000 is secured by way of a fixed and floating charge over the majority of the assets of THR
Number 43 plc (‘THR43’). 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 £795,949,000 as at 30 June 2022 (2021: £525,526,000).
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 and THR43 does not exceed 60 per cent;
– the interest cover for each of THR1 Group and THR15 Group is greater than 300 per cent on any calculation date; and
– the debt yield for THR12 Group and THR43 is greater than 10 per cent on any calculation date.
All bank loan covenants have been complied with during the year.
Analysis of net debt:
Cash and cash
equivalents
2022
£’000
Borrowing
2022
£’000
Net debt
2022
£’000
Cash and cash
equivalents
2021
£’000
Borrowing
2021
£’000
Net debt
2021
£’000
Opening balance 21,106 (127,904) (106,798) 36,440 (150,135) (113,695)
Cash flows 13,377 (102,911) (89,534) (15,334) 23,538 8,204
Non-cash flows – (568) (568) – (1,307) (1,307)
Closing balance as at 30 June 34,483 (231,383) (196,900) 21,106 (1 27,904) (106,798)
15. Trade and other payables
Non-current trade and other payables
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Rental deposits 7,145 6,840
Total 7,145 6,840
74 Target Healthcare REIT plc
Notes to the Consolidated Financial Statements continued
15. Trade and other payables continued
Current trade and other payables
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Rental income received in advance 8,390 5,719
Property acquisition and development costs accrued 8,892 6,632
Performance payments 2,800 1,550
Investment Manager’s fees payable 1,895 1,551
Interest payable 1,762 969
Other payables 2,624 2,044
Total 26,363 18,465
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 Number of shares £’000
Balance as at 30 June 2021 511,541,694 5,115
Issued on 9 September 2021 108,695,652 1,087
Balance as at 30 June 2022 620,237,346 6,202
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 2022, the Company issued 108,695,652 (2021: 54,054,054) ordinary shares of £0.01 each raising gross proceeds
of £125,000,000 (2021: £60,000,000). The consideration received in excess of the par value of the ordinary shares issued, net of the expenses
of issue of £2,508,000 (2021: £1,684,000), has been credited to the share premium account.
During the year to 30 June 2022, the Company did not repurchase any ordinary shares into treasury (2021: nil) or resell any ordinary shares
from treasury (2021: nil). At 30 June 2022, the Company did not hold any shares in treasury (2021: nil).
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.
75Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
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 £38,996,000 (2021: £24,563,000), consisting of cash
of £34,483,000 (2021: £21,106,000), net rent receivable of £906,000 (2021: £955,000), VAT recoverable of £1,387,000 (2021: £732,000),
accrued development interest of £452,000 (2021: £739,000) and other debtors of £1,768,000 (2021: £1,031,000).
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 Group may also require to provide rental incentives to the incoming tenant.
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 2022, the Group had recognised a credit loss allowance totalling £6,963,000 against a gross rent receivable balance of £7,399,000
and gross loans to tenants totalling £1,097,000. Whilst this allowance has increased during the year ended 30 June 2022, it remains low relative to
the Group’s overall balance sheet, and relates primarily to the tenant of two immature homes where rent is now being received in full in relation
to one of the homes, and partial rent being received in relation to the other. As at 30 June 2021, the gross rent receivable was £4,641,000, of
which £40,000 was subsequently recovered, £147,000 was written off and £4,454,000 is still outstanding. There were no other financial assets
which were either past due or considered impaired at 30 June 2022 (2021: 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.
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 2022 the Group held £34.5 million (2021: £20.9 million) with The Royal Bank of Scotland plc and £nil (2021:
£0.2 million) 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 2022
Three months
or less
£’000
More than three
months but less
than one year
£’000
1-2 years
£’000
2-5 years
£’000
More than
five years
£’000
Total
£’000
Cash 34,483 – – – – 34,483
Rental deposits held in escrow for tenants – – – – 7, 145 7,145
Other debtors 4,513 – – – – 4,513
Total 38,996 – – – 7,145 46,141
Financial assets as at 30 June 2021
Three months
or less
£’000
More than three
months but less
than one year
£’000
1-2 years
£’000
2-5 years
£’000
More than
five years
£’000
Total
£’000
Cash 21,106 – – – – 21,106
Rental deposits held in escrow for tenants – – – – 6,840 6,840
Other debtors 3,457 – – – – 3,457
Total 24,563 – – – 6,840 31,403
76 Target Healthcare REIT plc
Notes to the Consolidated Financial Statements continued
17. Financial instruments continued
At the reporting date, the maturity of the financial liabilities was:
Financial liabilities as at 30 June 2022
Three months
or less
£’000
More than three
months but less
than one year
£’000
1-2 years
£’000
2-5 years
£’000
More than
five years
£’000
Total
£’000
Bank loans and interest rate swaps 2,046 6,072 8,140 101,890 181,533 299,681
Rental deposits – – – – 7,145 7,145
Other payables 17,973 – – – – 17,973
Total 20,019 6,072 8,140 101,890 188,678 324,799
Financial liabilities as at 30 June 2021
Three months
or less
£’000
More than three
months but less
than one year
£’000
1-2 years
£’000
2-5 years
£’000
More than
five years
£’000
Total
£’000
Bank loans and interest rate swaps 1,106 3,282 4,388 88,250 59,094 156,120
Rental deposits – – – – 6,840 6,840
Other payables 12,746 – – – – 12,746
Total 13,852 3,282 4,388 88,250 65,934 175,706
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 2022 (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 2022 (30 June 2021) 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 2022, interest was being received on
cash at a weighted average variable rate of nil (2021: nil). Exposure varies throughout the period as a consequence of changes in the composition
of the net assets of the Group arising out of the investment and risk management policies. These balances expose the Group to cash flow interest
rate risk as the Group’s income and operating cash flows will be affected by movements in the market rate of interest.
The Group has £170,000,000 (2021: £170,000,000) of committed term loans and revolving credit facilities which were charged interest at a
rate of SONIA plus the relevant margin. At the year-end £84,750,000 of the variable rate facilities had been drawn down (2021: £80,000,000).
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
2022 and 30 June 2021.
The Group has not hedged its exposure on £54,750,000 of the drawn variable rate borrowings at 30 June 2022 (2021: £50,000,000). On
these loans the interest was payable at a variable rate equal to SONIA plus the weighted average lending margin, including the amortisation
of costs, of 2.43 per cent per annum (2021: 2.43 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 fixed rate term loans totalling £150,000,000 (2021: £50,000,000) and has hedged its exposure on £30,000,000 (2021:
£30,000,000) 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 £150,000,000
fixed rate term loans are 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 2022,
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 £211,000 (2021: £298,000). The same movement in interest rates would have decreased the
fair value of the fixed rate term loans by an aggregate of £2,822,000 (2021: £1,106,000); 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:
As at 30 June 2022 As at 30 June 2021
Fixed rate
£’000
Variable rate
£’000
Fixed rate
£’000
Variable rate
£’000
Cash and cash equivalents – 34,483 – 21,106
Bank loan (180,000) (54,750) (80,000) (50,000)
(180,000) (20,267) (80,000) (28,894)
77Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
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 £51,000 (2021: £72,000), a decrease in interest rates would have an equal and opposite effect.
These movements are calculated based on balances as at 30 June 2022 (30 June 2021) 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.
As set out in Note 9, Colliers are mindful of the potential impacts ESG may have on capital and rental valuations. Currently in the UK, the external
valuers have not seen consistent prima facie evidence to suggest that ESG has a direct impact on the valuation of all commercial and residential
buildings. However, as the UK real estate market continues to adapt to ESG development practices and legislative requirements, Colliers anticipate an
evolution in the analysis undertaken when providing real estate valuations. This may potentially impact on the valuation of a property over the course
of a typical investment period.
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 2022
(30 June 2021) would have increased net assets available to shareholders and increased the net income for the year by £85,769,000 (2021:
£63,116,000); 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. Lease length
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 15 and 35 years.
The minimum lease payments based on the unexpired lessor lease length at the year-end were as follows (based on annual rentals):
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Less than one year 54,408 41,068
Between one and two years 56,750 41,951
Between two and three years 57,618 42,762
Between three and four years 58,517 43,398
Between four and five years 59,439 44,061
Over five years 1,630,700 1,269,202
Total 1,917,432 1,482,442
The largest single tenant at the year-end accounted for 15.7 per cent (2021: 13.1 per cent) of the current annual rental income. There were
no unoccupied properties at the year-end (2021: none).
19. Contingent assets and liabilities
As at 30 June 2022, fourteen (2021: twelve) properties within the Group’s investment property portfolio contained performance payment
clauses meaning that, subject to contracted performance conditions being met, further capital payments totalling £13,320,000 (2021:
£20,025,000) 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 performance payments 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 performance payments made 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 two of these properties and therefore at 30 June 2022 an amount of £2,800,000 (2021: £1,550,000) has been
recognised as a liability (see Note 15). An equal but opposite amount has been recognised as an asset in ‘investment properties’ in Note 9 to
reflect the increase in the investment property value that would be expected to arise were the performance payments to be paid and the
contracted rental income increased accordingly.
78 Target Healthcare REIT plc
Notes to the Consolidated Financial Statements continued
20. Capital commitments
The Group had capital commitments as follows:
30 June 2022
£’000
30 June 2021
£’000
Amounts due to complete forward fund developments 34,458 21,054
Other capital expenditure commitments 3,594 3,158
Total 38,052 24,212
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
£214,000 (2021: £181,000) of which £nil (2021: £12,000) remained payable at the year-end.
The Investment Manager received £7,307,000 (inclusive of irrecoverable VAT) in management fees in relation to the year ended 30 June
2022 (2021: £5,796,000). Of this amount £1,895,000 (2021: £1,551,000) remained payable at the year-end. The Investment Manager received
a further £151,000 (inclusive of irrecoverable VAT) during the year ended 30 June 2022 (2021: £146,000) in relation to its appointment as
Company Secretary and Administrator, of which £38,000 (2021: £36,000) 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.
23. Post balance sheet events
As at 10 October 2022, the Company’s share price was 86.0 pence per share (30 June 2022: 108.4 pence).
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 2022 are shown below:
Leverage exposure
Gross
method
Commitment
method
Maximum limit 3.00 3.00
Actual 1.69 1.74
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.
79Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
Company Statement of Financial Position
As at 30 June 2022
Notes
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Non-current assets
Investment in subsidiary undertakings
3 698,341 509,228
Investment properties
4 7,626 20,506
Trade and other receivables
5 114 1,046
706,081 530,780
Current assets
Trade and other receivables
5 8,285 32,411
Cash and cash equivalents
6 9,406 3,024
17,691 35,435
Total assets 723,772 566,215
Non-current liabilities
Trade and other payables
7 (110) (240)
Current liabilities
Trade and other payables
7 (2,638) (2,179)
Total liabilities (2,748) (2,419)
Net assets 721,024 563,796
Share capital and reserves
Share capital
8 6,202 5,115
Share premium
8 256,633 135,228
Merger reserve 47,751 47,751
Distributable reserve 288,010 326,713
Capital reserve 120,873 47,652
Revenue reserve 1,555 1,337
Equity shareholders’ funds 721,024 563,796
Net asset value per ordinary share (pence)
9 116.2 110.2
Company number: 11990238
The Company made a profit for the year ended 30 June 2022 of £74,776,000 (2021: £44,484,000).
The financial statements on pages 79 to 88 were approved by the Board of Directors and authorised for issue on 11 October 2022 and were
signed on its behalf by:
Malcolm Naish
Chairman
The accompanying notes are an integral part of these financial statements.
80 Target Healthcare REIT plc
Company Statement of Changes in Equity
For the year ended 30 June 2022
Notes
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Distributable
reserve
£’000
Capital
reserve
£’000
Revenue
reserve
£’000
Total
£’000
At 30 June 2021 5,115 135,228 47,751 326,713 47,652 1,337 563,796
Total comprehensive income for the year – – – – 73,221 1,555 74,776
Transactions with owners recognised in equity:
Dividends paid
2 – – – (38,703) – (1,337) (40,040)
Issue of ordinary shares
8 1,087 123,913 – – – – 125,000
Expenses of issue
8 – (2,508) – – – – (2,508)
At 30 June 2022 6,202 256,633 47,751 288,010 120,873 1,555 721,024
For the year ended 30 June 2021
Notes
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Distributable
reserve
£’000
Capital
reserve
£’000
Revenue
reserve
£’000
Total
£’000
At 30 June 2020 4,575 77,452 47,751 358,319 6,077 (1,572) 492,602
Total comprehensive income for the year – – – – 41,575 2,909 44,484
Transactions with owners recognised in equity:
Dividends paid
2 – – – (31,606) – – (31,606)
Issue of ordinary shares
8 540 59,460 – – – – 60,000
Expenses of issue
8 – (1,684) – – – – (1,684)
At 30 June 2021 5,115 135,228 47,751 326,713 47,652 1,337 563,796
The accompanying notes are an integral part of these financial statements.
81Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
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 July 2022, 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 58 to 78. 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 63.
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 £74,776,000 (2021: £44,484,000).
The Company does not have any employees (2021: 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 £214,000 during the year ended 30 June 2022 (2021: £181,000).
Audit fees in relation to the parent company were £120,000 (2021: £106,000), including irrecoverable VAT. This included £2,000 payable
by the Company on behalf of certain subsidiaries (2021: £2,000). The fee for assurance related services, being the review of the Company’s
Interim Report, was £16,000 (2021: £15,000). There were no other non-audit fees paid to E&Y LLP by the Company during the year (2021: £nil).
82 Target Healthcare REIT plc
2. Dividends
Amounts paid as distributions to equity holders.
Dividend rate
(pence per share)
Year ended
30 June 2022
£’000
Dividend rate
(pence per share)
Year ended
30 June 2021
£’000
Fourth interim dividend for the prior year 1.68 8,594 1.67 7,6 40
First interim dividend 1.69 10,482 1.68 7,686
Second interim dividend 1.69 10,482 1.68 7,686
Third interim dividend 1.69 10,482 1.68 8,594
Total 6.75 40,040 6.71 31,606
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 2022, of 1.69 pence per share, was paid on 26 August 2022 to shareholders
on the register on 12 August 2022 and amounted to £10,482,000. 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 2022, the Company’s directly held subsidiary undertakings were:
Name
Country of
incorporation
Class of
Capital
% of class
held
% of equity
held
Book Cost
£’000
Fair Value
£’000
Target Healthcare REIT Limited Jersey Ordinary 100 100 432,841 421,444
THR Number 12 plc England & Wales Ordinary 100 100 103,336 149,663
THR Number 37 Limited England & Wales Ordinary 100 100 5,647 5,560
THR Number 39 Limited England & Wales Ordinary 100 100 2,904 2,183
THR Number 40 Limited England & Wales Ordinary 100 100 1,898 1,788
THR Number 41 Limited England & Wales Ordinary 100 100 8,144 7,424
THR Number 42 Limited England & Wales Ordinary 100 100 – (5)
THR Number 43 plc England & Wales Ordinary 100 100 94,861 106,422
THR Number 45 Limited England & Wales Ordinary 100 100 4,7 74 3,688
THR Number 46 Limited England & Wales Ordinary 100 100 – (5)
THR Number 47 Limited England & Wales Ordinary 100 100 – 179
Total 654,405 698,341
The registered office of Target Healthcare REIT Limited at 30 June 2022 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:
Year ended
30 June 2022
£’000
Year ended
30 June 2021
£’000
Opening fair value 509,228 457,731
Additions 184,090 9,363
Disposals (51,089) –
Movement in fair value 56,112 42,134
Closing fair value 698,341 509,228
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.
Notes to the Company Financial Statements continued
83Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
As at 30 June 2022, 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 England & Wales Ordinary 100 100
THR Number Two Limited England & Wales Ordinary 100 100
THR Number 3 Limited England & Wales Ordinary 100 100
THR Number 4 Limited England & Wales Ordinary 100 100
THR Number 5 Limited England & Wales Ordinary 100 100
THR Number 6 Limited England & Wales Ordinary 100 100
THR Number 7 Limited Gibraltar Ordinary 100 100
THR Number 8 Limited Gibraltar Ordinary 100 100
THR Number 9 Limited England & Wales Ordinary 100 100
THR Number 10 Limited England & Wales Ordinary 100 100
THR Number 11 Limited Scotland Ordinary 100 100
THR Number 13 Limited England & Wales Ordinary 100 100
THR Number 14 Limited England & Wales Ordinary 100 100
THR Number 15 plc England & Wales Ordinary 100 100
THR Number 16 Limited England & Wales Ordinary 100 100
THR Number 17 (Holdings) Limited England & Wales Ordinary 100 100
THR Number 17 Limited England & Wales Ordinary 100 100
THR Number 18 Limited England & Wales Ordinary 100 100
THR Number 19 Limited England & Wales Ordinary 100 100
THR Number 20 Limited England & Wales Ordinary 100 100
THR Number 21 Limited England & Wales Ordinary 100 100
THR Number 22 Limited England & Wales Ordinary 100 100
THR Number 23 Limited England & Wales Ordinary 100 100
THR Number 24 Limited England & Wales Ordinary 100 100
THR Number 25 S.à r.l. Luxembourg Ordinary 100 100
THR Number 26 S.à r.l. Luxembourg Ordinary 100 100
THR Number 27 Limited England & Wales Ordinary 100 100
THR Number 28 Limited England & Wales Ordinary 100 100
THR Number 29 Limited England & Wales Ordinary 100 100
THR Number 30 Limited England & Wales Ordinary 100 100
THR Number 31 Limited England & Wales Ordinary 100 100
THR Number 32 Limited England & Wales Ordinary 100 100
THR Number 33 Limited England & Wales Ordinary 100 100
THR Number 34 Limited England & Wales Ordinary 100 100
THR Number 35 Limited England & Wales Ordinary 100 100
THR Number 36 Limited England & Wales Ordinary 100 100
THR Number 38 Limited England & Wales Ordinary 100 100
THR Number 48 Limited England & Wales Ordinary 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: Glendevon House, Castle Business Park, Stirling FK9 4TZ.
The Group had a further eight indirectly held subsidiary undertakings, which were acquired during a prior year. As these companies have been
dormant since acquisition and have been placed into liquidation, these are not listed above.
84 Target Healthcare REIT plc
4. Investment properties
Freehold properties
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Opening market value 21,320 6,919
Opening fixed or guaranteed rent reviews and lease incentives (814) (324)
Opening carrying value 20,506 6,595
Purchases 7,600 14,228
Disposals – proceeds (22,050) –
– gain on sale 1,140 –
Unrealised gain realised during the year (410) –
Acquisition costs capitalised 662 733
Acquisition costs written off (662) (733)
Revaluation movement – gains 30 173
Movement in market value (13,690) 14,401
Fixed or guaranteed rent reviews and lease incentives derecognised on disposal 978 –
Movement in fixed or guaranteed rent reviews and lease incentives (168) (490)
Movement in carrying value (12,880) 13,911
Closing market value 7,630 21,320
Closing fixed or guaranteed rent reviews and lease incentives (4) (814)
Closing carrying value 7,626 20,506
The properties were valued at £7,630,000 (2021: £21,320,000) 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 2022) 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 £7,626,000 (2021: £20,506,000). The adjustment
consisted of £4,000 (2021: £567,000) relating to fixed or guaranteed rent reviews and £nil (2021: £247,000) 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 and included a single care home at the
year end, is considered to be a single class of assets. The weighted average net initial yield on the property, as measured by the EPRA topped
up NIY, is 5.2 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 £76,000 (2021: £213,000); 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 £389,000 (2021: £972,000),
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 £353,000 (2021: £891,000) and reduce the Company’s income.
Notes to the Company Financial Statements continued
85Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
5. Trade and other receivables
Non-current trade and other receivables
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Fixed rent reviews 4 567
Rental deposits held in escrow for tenants 110 240
Lease incentives – 239
Total 114 1,046
Current trade and other receivables
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Lease incentives – 8
Balances due from group undertakings 8,030 32,204
Other debtors and prepayments 255 199
Total 8,285 32,411
At the year-end, trade and other receivables include a fixed rent review debtor of £4,000 (2021: £567,000) which represents the effect of
recognising guaranteed rental uplifts on a straight line basis over the lease term and £nil (2021: £247,000) 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
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Cash at bank and in hand 9,406 3,024
Total 9,406 3,024
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
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Rental deposits 110 240
Total 110 240
Current trade and other payables
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Rental income received in advance 420 221
Income tax payable 1,067 812
Investment Manager’s fees payable 245 412
Other payables 906 734
Total 2,638 2,179
The Group’s payment policy is to ensure settlement of supplier invoices in accordance with stated terms.
86 Target Healthcare REIT plc
8. Share capital
Allotted, called-up and fully paid ordinary shares of £0.01 each Number of shares £’000
Balance as at 30 June 2021 511,541,694 5,115
Issued on 9 September 2021 108,695,652 1,087
Balance as at 30 June 2022 620,237,346 6,202
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 2022, the Company issued 108,695,652 (2021: 54,054,054) ordinary shares of £0.01 each raising gross proceeds
of £125,000,000 (2021: £60,000,000). The consideration received in excess of the par value of the ordinary shares issued, net of the expenses
of issue of £2,508,000 (2021: £1,684,000), has been credited to the share premium account.
During the year to 30 June 2022, the Company did not repurchase any ordinary shares into treasury (2021: nil) or resell any ordinary shares
from treasury (2021: nil). At 30 June 2022, the Company did not hold any shares in treasury (2021: 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 74.
9. Net Asset Value
The Company’s net asset value per ordinary share of 116.2 pence (2021: 110.2 pence) is based on equity shareholders’ funds of £721,024,000
(2021: £563,796,000) and on 620,237,346 (2021: 511,541,694) 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 £17,477,000 (2021: £35,228,000) consisting of
balances due from Group undertakings of £8,030,000 (2021: £32,204,000), cash balances of £9,406,000 (2021: £3,024,000) and other
debtors of £41,000 (2021: £nil).
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.
Notes to the Company Financial Statements continued
87Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
At the reporting date, the maturity of the financial assets was:
Financial assets as at 30 June 2022
Three months
or less
£’000
More than three
months but less
than one year
£’000
1-2 years
£’000
2-5 years
£’000
More than
five years
£’000
Total
£’000
Cash and cash equivalents 9,406 – – – – 9,406
Rental deposits held in escrow for tenants – – – – 110 110
Balances due from group undertakings 8,030 – – – – 8,030
Other debtors 41 – – – – 41
Total 17,477 – – – 110 17,587
Financial assets as at 30 June 2021
Three months
or less
£’000
More than three
months but less
than one year
£’000
1-2 years
£’000
2-5 years
£’000
More than
five years
£’000
Total
£’000
Cash and cash equivalents 3,024 – – – – 3,024
Rental deposits held in escrow for tenants – – – – 240 240
Balances due from group undertakings 32,204 – – – – 32,204
Total 35,228 – – – 240 35,468
At the reporting date, the maturity of the financial liabilities was:
Financial liabilities as at 30 June 2022
Three months
or less
£’000
More than three
months but less
than one year
£’000
1-2 years
£’000
2-5 years
£’000
More than
five years
£’000
Total
£’000
Rental deposits – – – – 110 110
Other payables 2,218 – – – – 2,218
Total 2,218 – – – 110 2,328
Financial liabilities as at 30 June 2021
Three months
or less
£’000
More than three
months but less
than one year
£’000
1-2 years
£’000
2-5 years
£’000
More than
five years
£’000
Total
£’000
Rental deposits – – – – 240 240
Other payables 1,958 – – – – 1,958
Total 1,958 – – – 240 2,198
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 2022 (2021: nil).
The following table sets out the carrying amount of the Company’s financial instruments that are exposed to interest rate risk:
As at 30 June 2022 As at 30 June 2021
Fixed rate
£’000
Variable rate
£’000
Fixed rate
£’000
Variable rate
£’000
Cash and cash equivalents – 9,406 – 3,024
Balances due from group undertakings 8,030 – 32,204 –
Total 8,030 9,406 32,204 3,024
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 £24,000 (2021: £8,000), a decrease in interest rates would have an equal and
opposite effect. These movements are calculated based on balances as at 30 June 2022 (30 June 2021) 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.
88 Target Healthcare REIT plc
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):
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Less than one year 440 1,325
Between one and two years 445 1,349
Between two and three years 449 1,374
Between three and four years 454 1,399
Between four and five years 458 1,424
Over five years 16,064 54,391
Total 18,310 61,262
The largest single tenant at the year-end accounted for 100 per cent (2021: 63.2 per cent) of the current annual rental income. There were no
unoccupied properties at the year-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 35 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 £214,000 (2021:
£181,000) of which £nil (2021: £12,000) remained payable at the year-end.
The Investment Manager received management fees of £1,453,000 (inclusive of irrecoverable VAT) from the Company in relation to the year
ended 30 June 2022 (2021: £1,334,000). Of this amount £245,000 (2021: £412,000) remained payable at the year-end.
The Investment Manager received a further £151,000 (inclusive of irrecoverable VAT) during the year ended 30 June 2022 (2021: £146,000) in
relation to its appointment as Company Secretary and Administrator. Of this amount £38,000 (2021: £36,000) remained payable at the year-end.
13. Post balance sheet events
As at 10 October 2022, the Company’s share price was 86.0 pence per share (30 June 2022: 108.4 pence).
Notes to the Company Financial Statements continued
89Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
Notice of Annual General Meeting
NOTICE IS HEREBY GIVEN that the fourth Annual General Meeting (‘AGM’) of Target Healthcare REIT plc (the ‘Company’) will be held on
Tuesday 6 December 2022 at 12.00 noon at the offices of Dickson Minto W.S., Broadgate Tower, 20 Primrose Street, London EC2A 2EW
for the purposes of considering and, if thought fit, passing the following resolutions, of which resolutions 1 to 12 inclusive will be proposed
as ordinary resolutions and resolutions 13 to 15 inclusive will be proposed as special resolutions:
Ordinary resolutions
1. That the Annual Report and Accounts for the year ended 30 June 2022 be received.
2. That the Directors’ Remuneration Policy be approved.
3. That the Directors’ Annual Report on Remuneration for the year ended 30 June 2022 be approved.
4. That the Company’s dividend policy be approved.
5. That Ernst & Young LLP be re-appointed as the Company’s Auditor until the conclusion of the next Annual General Meeting.
6. That the Directors be authorised to determine the Auditor’s remuneration.
7. To elect Amanda Thompsell as a Director.
8. To elect Richard Cotton as a Director.
9. To re-elect Alison Fyfe as a Director.
10. To re-elect Vince Niblett as a Director.
11. That, pursuant to Article 156 of the Company’s Articles of Association, the Company shall continue in existence.
12. 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 and to grant rights to subscribe for or to convert any security into shares in the Company (“Securities”) up to
an aggregate nominal amount of £620,237 (being approximately 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 enter into agreements which would or might require shares to be allotted or Securities to be granted and the Directors
may allot shares or grant Securities in pursuance of such offer or agreement as if the authority conferred by this resolution had not expired.
Special resolutions
13. That, subject to the passing of resolution 12, 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 12 or by way of a sale of treasury shares as if section 561 of the Act did not apply to any such allotment or sale, 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 or sell treasury shares in pursuance of any such
offer or agreement as if the power conferred by this resolution had not expired; and
(b) shall be limited to the allotment of equity securities for cash up to an aggregate nominal amount of £620,237 (being approximately
equal to 10% of the nominal value of the issued share capital of the Company immediately prior to the passing of this resolution).
This power applies in relation to the sale of treasury shares as if in the opening paragraph of this resolution the words “subject to the
passing of resolution 12” were omitted.
14. To authorise the Company generally and unconditionally, pursuant to and in accordance with section 701 of the Companies Act 2006, 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) either for retention as treasury shares for future reissue, resale or transfer or
cancellation 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 and may make a purchase of shares pursuant to any such contract.
15. 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
11 October 2022
90 Target Healthcare REIT plc
Notes:
1. Only those shareholders registered in the Company’s register of members at 10.00 p.m. on 2 December 2022 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 12.00 p.m. on
2 December 2022 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 12.00 p.m. on 2 December 2022 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 12.00 p.m. on 2 December 2022 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 11 October 2022, 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 11 October 2022 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.
Notice of Annual General Meeting continued
91Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
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
25 October 2022. 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 Glendevon House, Castle Business
Park, Stirling FK9 4TZ; (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 90 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.
92 Target Healthcare REIT plc
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.
93Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
The statements on taxation on pages 92 and 93 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 2022
Fourth interim dividend 11/08/22 26/08/22 – 1.69000 1.69000
Third interim dividend 12/05/22 27/05/22 1.69000 – 1.69000
Second interim dividend 10/02/22 25/02/22 1.69000 – 1.69000
First interim dividend 11/11/21 26/11/21 1.69000 – 1.69000
Total 5.07000 1.69000 6.76000
In relation to the year ended 30 June 2021
Fourth interim dividend 12/08/21 27/08/21 0.16800 1.51200 1.68000
Third interim dividend 13/05/21 28/05/21 1.68000 – 1.68000
Second interim dividend 11/02/21 26/02/21 1.68000 – 1.68000
First interim dividend 12/11/20 27/11/20 1.68000 – 1.68000
Total 5.20800 1.51200 6.72000
In relation to the year ended 30 June 2020
Fourth interim dividend 13/08/20 28/08/20 0.08350 1.58650 1.67000
Third interim dividend 07/05/20 29/05/20 1.67000 – 1.67000
Second interim dividend 13/02/20 28/02/20 1.67000 – 1.67000
First interim dividend 14/11/19 29/11/19 1.67000 – 1.67000
Total 5.09350 1.58650 6.68000
In relation to the year ended 30 June 2019*
Fourth interim dividend 18/07/19 02/08/19 – 1.64475 1.64475
Third interim dividend 02/05/19 31/05/19 1.64475 – 1.64475
Second interim dividend 07/02/19 22/02/19 1.64475 – 1.64475
First interim dividend 25/10/18 30/11/18 1.64475 – 1.64475
Total 4.93425 1.64475 6.57900
In relation to the year ended 30 June 2018*
Fourth interim dividend 09/08/18 31/08/18 1.12870 0.48380 1.61250
Third interim dividend 03/05/18 25/05/18 1.61250 – 1.61250
Second interim dividend 01/02/18 23/02/18 1.61250 – 1.61250
First interim dividend 16/11/17 30/11/17 1.61250 – 1.61250
Total 5.96620 0.48380 6.45000
* 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,
a Jersey-registered company in relation to which the tax consequences set out on pages 92 and 93 may differ.
94 Target Healthcare REIT plc
Historical Record
Assets
At 30 June 2014 2015 2016 2017 2018 2019 2020 2021 2022
Total assets (£’000) 105,071 176,310 282,791 306,246 434,822 538,379 663,772 718,394 963,658
Market value of property
portfolio (£’000) 83,246 143,748 210,666 281,951 385,542 500,884 617,584 684,845 911,596
Shareholders’ funds (£’000) 90,218 139,292 253,282 256,937 358,607 413,089 494,113 565,185 698,767
Performance
At 30 June 2014 2015 2016 2017 2018 2019 2020 2021 2022
EPRA NTA per share 94.7p 97.9p 100.6p 101.9p 105.7p 107. 5p 108.1p 110.4p 112.3p
Share price 104.8p 106.9p 109.0p 1 17.8p 110.5p 115.6p 110.0p 115.4p 108.4p
Premium/(discount) 10.6% 9.2% 8.3% 15.6% 4.5% 7.5% 1.8% 4.5% (3.5)%
IFRS EPS 1.08p 8.02p 6.81p 7.58 p 9.77p 8.10p 7.18p 9.23p 8.20p
Adjusted EPRA EPS 4.41p 6.10p 5.25p 5.23p 5.54p 5.45p 5.27p 5.46p 5.05p
Dividends per share 6.00p 6.12p 6.18p 6.28p 6.45p 6.58p 6.68p 6.72p 6.76p
Ongoing charges 1.95% 1.58% 1.42% 1.48% 1.48% 1.52% 1.51% 1.55% 1.51%
Contact Information
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/scam;
– 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; and
– 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.
Shareholder Information continued
95Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
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 99 to 101, 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.
2022
pence
2021
pence
EPRA Net Tangible Assets per share (see page 69) (a) 112.3 110.4
Share price (b) 108.4 115.4
(Discount)/premium = (b-a)/a (3.5)% 4.5%
Dividend Cover – the percentage by which Group specific adjusted EPRA earnings for the year cover the dividend paid.
2022
£’000
2021
£’000
Group-specific EPRA earnings for the year (see page 69) (a) 30,242 25,955
First interim dividend 10,482 7,686
Second interim dividend 10,482 7,686
Third interim dividend 10,482 8,594
Fourth interim dividend 10,482 8,594
Dividends paid in relation to the year (b) 41,928 32,560
Dividend cover = (a/b) 72% 80%
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.
2022
£’000
2021
£’000
Investment management fee 7,307 5,796
Other expenses 3,163 2,617
Less direct property costs and other non-recurring items (347) (263)
Adjustment to management fee arrangements and irrecoverable VAT* 312 49
Total (a) 10,435 8,199
Average net assets (b) 693,292 528,035
Ongoing charges = (a/b) 1.51% 1.55%
* Based on the Group’s net asset value at 30 June 2022, the management fee is expected to be paid at a weighted average rate of 1.02% (2021: 1.04%) of the Group’s
average net asset plus an effective irrecoverable VAT rate of approximately 7% (2021: 7%). The management fee has therefore been amended so that the Ongoing
Charges figure includes the expected all-in management fee rate of 1.10% (2021: 1.11%).
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.
2022 2021
EPRA NTA
(pence)
IFRS NAV
(pence)
Share price
(pence)
EPR A NTA
(pence)
IFRS NAV
(pence)
Share price
(pence)
Value at start of year (a) 110.4 110.5 115.4 108.1 108.0 110.0
Value at end of year (b) 112.3 112.7 108.4 110.4 110.5 115.4
Change in value during the year (b-a) (c) 1.9 2.2 (7.0) 2.3 2.5 5.4
Dividends paid (d) 6.8 6.8 6.8 6.7 6.7 6.7
Additional impact of dividend reinvestment (e) 0.3 0.3 (0.2) 0.5 0.4 0.3
Total gain in year (c+d+e) (f) 9.0 9.3 (0.4) 9.5 9.6 12.4
Total return for the year = (f/a) 8.1% 8.4% (0.3)% 8.8% 8.9% 11.3%
96 Target Healthcare REIT plc
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 February 2022.
2022 2021
EPRA Net Reinstatement Value (£’000) 756,708 609,630
EPRA Net Tangible Assets (£’000) 696,483 564,934
EPRA Net Disposal Value (£’000) 721,024 563,796
EPRA Net Reinstatement Value per share (pence) 122.0 119.2
EPRA Net Tangible Assets per share (pence) 112.3 110.4
EPRA Net Disposal Value per share (pence) 116.2 110.2
EPRA Earnings (£’000) 39,674 34,047
Group specific adjusted EPRA earnings (£’000) 30,242 25,955
EPRA Earnings per share (pence) 6.62 7.16
Group specific adjusted EPRA earnings per share (pence) 5.05 5.46
EPRA Net Initial Yield 5.38% 5.76%
EPRA Topped-up Net Initial Yield 5.82% 5.83%
EPRA Vacancy Rate – –
EPRA Cost Ratio (including direct vacancy costs) 21.5% 22.3%
EPRA Group specific adjusted Cost Ratio (including direct vacancy costs) 27. 1% 26.6%
EPRA Cost Ratio (excluding direct vacancy costs) 21.5% 22.3%
EPRA Group specific adjusted Cost Ratio (excluding direct vacancy costs) 27.1% 26.6%
EPRA Loan-to-Value 24.0% 17.8%
Capital Expenditure (£’000) 209,540 54,859
Like-for-like Rental Growth 4.6% 0.1%
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 68 and 69.
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).
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Annualised passing rental income based on cash rents (a) 51,217 40,763
Notional rent expiration of rent-free periods or other lease incentives 4,259 450
Topped-up net annualised rent (b) 55,476 41,213
Standing assets including properties held for sale (see pages 70 and 71) 892,336 662,495
Allowance for estimated purchasers’ costs 60,225 44,696
Grossed-up completed property portfolio valuation (c) 952,561 707,191
EPRA Net Initial Yield = (a/c) 5.38% 5.76%
EPRA Topped-up Net Initial Yield = (b/c) 5.82% 5.83%
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.
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Annualised potential rental value of vacant premises* (a) – –
Annualised potential rental value of the property portfolio (including vacant properties) (b) 55,476 41,213
EPRA Vacancy Rate = (a/b) – –
* As detailed in Note 18 to the Consolidated Financial Statements, there were no unoccupied properties at either 30 June 2021 or 30 June 2022.
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.
97Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
Year ended
30 June 2022
£’000
Year ended
30 June 2021
£’000
Investment management fee 7,307 5,796
Credit loss allowance and bad debts 3,232 2,717
Other expenses 3,163 2,617
EPRA costs (including direct vacancy costs) (a) 13,702 11,130
Specific cost adjustments, if applicable – –
Group specific adjusted EPRA costs (including direct vacancy costs) (b) 13,702 11,130
Direct vacancy costs (c) – –
Gross rental income per IFRS (d) 63,859 49,980
Adjusted for rental income arising from recognising guaranteed rent review uplifts and lease
incentives (10,215) (8,739)
Adjusted for surrender premiums recognised in capital (3,877) –
Adjusted for development interest under forward fund arrangements 783 647
Group specific adjusted gross rental income (e) 50,550 41,888
EPRA Cost Ratio (including direct vacancy costs) = (a/d) 21.5% 22.3%
EPRA Group specific adjusted Cost Ratio (including direct vacancy costs) = (b/e) 27.1% 26.6%
EPRA Cost Ratio (excluding direct vacancy costs) = ((a-c)/d) 21.5% 22.3%
EPRA Group specific adjusted Cost Ratio (excluding direct vacancy costs) = ((b-c)/e) 27.1% 26.6%
EPRA Loan-to-Value (‘LTV’)
As at
30 June 2022
£’000
As at
30 June 2021
£’000
Borrowings 234,750 130,000
Net payables 18,213 13,113
Cash and cash equivalents (34,483) (21,106)
Net debt (a) 218,480 122,007
Investment properties at market value 911,596 677, 525
Properties held for sale – 7,320
Total property value (b) 911,596 684,845
EPRA Loan-to-Value = (a/b) 24.0% 17.8%
EPRA Capital Expenditure
Year ended
30 June 2022
£’000
Year ended
30 June 2021
£’000
Acquisitions (including acquisition costs) 178,830 34,808
Forward fund developments 28,851 20,032
Like-for-like portfolio 1,859 19
Total capital expenditure 209,540 54,859
Conversion from accrual to cash basis (2,547) (3,459)
Total capital expenditure on a cash basis 206,993 51,400
Like-for-like Rental Growth
Year ended
30 June 2022
£’000
Year ended
30 June 2021
£’000
Opening contractual rent (a) 41,213 39,013
Rent reviews 1,581 686
Movement in variable rental leases – (162)
Re-tenanting of properties 312 (468)
Like-for-like rental growth (b) 1,893 56
Acquisitions and developments 12,370 2,582
Disposals – (438)
Total movement (c) 14,263 2,200
Closing contractual rent = (a+c) 55,476 41,213
Like-for-like rental growth = (b/a) 4.6% 0.1%
98 Target Healthcare REIT plc
0
4
8
12
16
20
24
1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011 2021 2031 2041 2051 2061 2071 2081 2091 2101 2111
Number of people (million)
65–74 75–84 85+
2046
c.2x over 85s
Today
15
10
5
0
0 5 15 20
Total Return (per annum) %
< Reduced risk Risk (standard deviation) Increased risk >
Industrial
THRL Portfolio
Office
Primary
Healthcare
Retail
Gilts
Residential Index
All property
Healthcare
Equities
Real Estate Equities
Total supply Total demand Fit-for-
purpose
supply
465k
beds
135k
beds
250k
shortage
385k
residents
14%
29%
2014
2022
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.
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.
1. Demographics
– Number of over 85s forecast
to nearly 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.
2. Real estate standards
– Resident and family expectations
on accommodation quality are
increasing.
– Only 29% 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.
Total en suite wet-room provision
Proportion of the market is increasing as
older homes close and new homes are built
Sources:
Target Fund Managers/Carterwood Research.
Source: MSCI, based on annual index to 31 December 2021.
Eight year total return vs standard deviation 2014-2021
People aged 64 and over: Trend and projections
Supply and demand
Data Centre
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.
99Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
Glossary of Terms and Definitions
Corporate Terms
AIC
Association of Investment Companies. This is the trade body for Closed-end Investment Companies
(www.theaic.co.uk).
AIFMD
The UK version of the Alternative Investment Fund Managers Directive and all delegated legislation
thereunder as it forms part of UK law pursuant to the European Union (Withdrawal) Act 2018, as
amended. Issued by the European Parliament in 2012 and 2013, the Directive requires that all investment
vehicles in the European Union, including Closed-end Investment Companies, must have appointed
a Depositary and an Alternative Investment Fund Manager. The Board of Directors of a Closed-end
Investment Company, nevertheless, remains fully responsible for all aspects of the company’s strategy,
operations and compliance with regulations.
Closed-end Investment
Company
A company with a fixed issued ordinary share capital which is traded on an exchange at a price not
necessarily related to the Net Asset Value of the company and where shares can only be issued or
bought back by the company in certain circumstances. This contrasts with an open-ended investment
company, which has units not traded on an exchange but issued or bought back from investors at a
price directly related to the Net Asset Value.
CQC
Care Quality Commission. The independent regulator of all health and social care services in England.
Depositary
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.
Discount/Premium*
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 95.
Dividend
The income from an investment. The Company currently pays interim dividends to shareholders quarterly.
Dividend Cover*
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 95.
Dividend Yield*
The annual Dividend expressed as a percentage of the share price at the date of calculation.
EPRA Best Practice
European Public Real Estate Association. A not-for-profit organisation which aims to foster trust for,
and encourage greater investment in, listed real estate in Europe (www.epra.com). EPRA also issue
best practice recommendations to enhance the financial reporting of listed property companies.
EPRA Cost Ratio
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 pages 96 and 97.
EPRA Earnings per Share*
Recurring earnings from core operational activities. A key measure of a company’s underlying operating
results from its property rental business and an indication of the extent to which current dividend
payments are supported by earnings. 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 Loan-to-Value (‘LTV’)*
A shareholder-gearing measure to determine the percentage of debt comparing to the appraised value
of the properties. EPRA LTV is calculated as total gross debt (adding net trade payables and less cash)
as a proportion of gross property value. The detailed method of calculation is shown on page 97.
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*
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 96.
EPRA Net Reinstatement Value
(‘NRV’)*
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.
100 Target Healthcare REIT plc
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 96.
GAAP
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.
Gearing
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.
Investment Manager
The Company’s Investment Manager is Target Fund Managers Limited. Further details are set out on
pages 30 and 31 and in Note 2 to the Consolidated Financial Statements.
Leverage
As defined under AIFMD rules, leverage is any method by which the exposure of an AIF is increased
through borrowing of cash or securities or leverage embedded in derivative positions. Leverage is
broadly equivalent to Gearing, but is expressed as a ratio between the assets (excluding borrowings)
and the net assets (after taking account of borrowing). Under the gross method, exposure represents the
sum of the 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.
Loan-to-Value*
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.
Market Capitalisation
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.
MSCI
Produces indexes for both privately-held real estate portfolios, as well as publicly-listed organisations
which provides a long performance history and which are mostly appraised quarterly.
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*
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 95.
Ordinary Shares
The main type of equity capital issued by conventional Investment Companies. Shareholders are entitled
to their share of both income, in the form of dividends paid by the Investment Company, and any capital
growth. 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 92 and 93.
Share Price
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.
SORP
Statement of Recommended Practice ‘Financial Statements of Investment Trust Companies and Venture
Capital Trusts’ issued by the AIC.
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. The detailed method of calculation is shown on page 95.
* Alternative Performance Measure.
Glossary of Terms and Definitions continued
101Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
Property and ESG Terms
Break Option
A clause in a lease which provides the landlord or tenant with an ability to terminate the lease before
its contractual expiry date.
Building Research Establishment
Environmental Assessment
Method (‘BREEAM’)
BREEAM is the world’s leading science-based suite of validation and certification systems for sustainable
built environment. The BREEAM in-use standards provide a framework to enable property investors,
owners, managers and occupiers to determine and drive sustainable improvements in the operational
performance of their assets, leading to benchmarking, assurance and validation of operational asset
data.
Contractual Rent
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.
COP26
The 26th UN Climate Change Conference held in November 2021.
Deed of Surrender
A legal document which allows the early termination of a lease upon the agreement of both parties. It
will list the obligations that need to be fulfilled by both parties before the rights and interests under the
lease are extinguished. Depending on the circumstances a surrender premium may be payable from the
Group to the tenant, or receivable by the Group from the tenant.
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.
Energy Performance Certificate
(‘EPC’)
An Energy Performance Certificate (EPC) rates how energy efficient a building is using grades from A
to G (with ‘A’ the most efficient grade). All commercial properties leased to a tenant must have an EPC.
All EPCs are valid for 10 years.
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
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.
GRESB
GRESB is a mission-driven and investor-led organisation that provides actionable and transparent
ESG data to financial markets. GRESB collects, validates, scores and benchmarks ESG data using a
standardised, globally recognised framework so that both investors and Investment Managers can
act on ESG data and insights.
Lease
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.
Lease Incentive
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.
Lease Renewal
The renegotiation of a lease with the existing tenant at its contractual expiry.
Mature Homes
Care homes which have been in operation for more than three years. There were 58 homes in the
Group’s portfolio which both met this definition and were held by the Group for the entire duration of
the year ended 30 June 2022, closing at 81 homes on 30 June 2022.
Occupancy Rate
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*
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.
Rent Review
A periodic review of rent during the term of a lease, as provided for within a lease agreement.
Surrender Premium
A sum of monies that may be paid from the tenant to the landlord, or from the landlord to a tenant,
in order to extinguish a lease prior to the termination date originally set out in the lease agreement.
Valuer
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.
WAULT*
Weighted average unexpired lease term. The average lease term remaining to expiry across the portfolio
weighted by contracted rental income.
* Alternative Performance Measure.
102 Target Healthcare REIT plc
Notes
103Annual Report and Financial Statements 2022
Financial Statements Additional InformationCorporate GovernanceStrategic Report
104 Target Healthcare REIT plc
Notes
Corporate Information
Directors
Malcolm Naish (Chairman)
Gordon Coull*
Alison Fyfe
Vince Niblett**
Amanda Thompsell
Registered Office
AIFM and Investment Manager,
Company Secretary and Administrator
Target Fund Managers Limited
Glendevon House
Castle Business Park
Stirling FK9 4TZ
Legal Adviser
Dickson Minto W.S.
Broadgate Tower
20 Primrose Street
London EC2A 2EW
Broker
Stifel Nicolaus Europe Limited
150 Cheapside
London EC2V 6ET
Valuers
Colliers International Healthcare Property Consultants Limited
50 George Street
London W1U 7GA
Auditors
Ernst & Young LLP
Atria One
144 Morrison Street
Edinburgh EH3 8EX
Tax Adviser
Deloitte LLP
Athene Place
66 Shoe Lane
London EC4A 3BQ
Tax Compliance
Alvarez & Marsal Taxand UK LLP
1 West Regent Street
Glasgow G2 1RW
Depositary
IQ EQ Depositary Company (UK) Limited
Two London Bridge
London SE1 9RA
Registrars
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS13 8AE
Website
www.targethealthcarereit.co.uk
* Senior Independent Director
** Chairman of Audit Committee
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