Company Announcements

Strategy in Action

Robust portfolio

Resilient portfolio performance. Rent and valuation increases on a like-for-like basis. Growth and diversification enhancements from acquisitions and portfolio management.

Performance

The Group's portfolio of 71 completed assets is 100 per cent let to 27 tenants. Like-for-like rental and valuation growth have been 1.5 per cent and 2.8 per cent respectively - the former being driven by the upwards-only rent reviews which are a characteristic of all the Group's leases. Rental collection has been positive through the period affected by the COVID pandemic, at 95 per cent¹ in respect of the March and June 2020 rental quarter dates combined.

This rent collection has been underpinned by solid trading performance across the portfolio - last 12 months rent cover across the Mature Homes in the portfolio has averaged 1.5 times over the last three years and on a rolling last 12 months basis has been 1.6 times over the most recent two quarters (matching pre-COVID-19 levels), further demonstrating the portfolio's resilience and sustainable rent levels.

¹After allowing for temporary agreements in respect of a limited proportion of care homes in the portfolio to pay monthly in advance. Excluded from this collection analysis are two of the portfolio's immature care homes on which agreements were in place prior to the pandemic to defer rental payments.

Acquisitions

£117 million of investment, inclusive of costs, has been made on the following assets during the year:

-- £100 million on trading care homes

-- £17 million on new developments/forward commitments

These new investments have complemented the substantial progress made in the year at the Group's sites with development agreements, with seven new homes comprising 520 new beds opening to residents during the year, underlining our commitment to the modernisation of the sector's real estate.

Diversification metrics

Acquisitions and portfolio management have added three (net) new tenants. No individual tenant accounts for more than 12 per cent of contractual rent.

Sources of resident fees, the underlying income received by our tenants, continues to originate from both public and private sources. Census data collected during the period notes that 48 per cent of residents are funded exclusively from private sources, 18 per cent by a mix of private and public funding, where "top-up" payments are made by Local Authorities, and 34 per cent are funded from public sources.

Geographically, the largest region by asset value has changed from the South-East to Yorkshire & the Humber, with 21 per cent.

Specialist, engaged landlord

We strongly believe that a deep understanding of the sector is vital to deliver returns from socially responsible investment.

The care sector is a vital one, and therefore requires insight, knowledge and sensitivity. The Manager has to invest in the right homes with the right tenants and provide a highly engaged stewardship of the portfolio. Our approach to asset management comprises numerous touch-points with tenants, via home visits and contact at Executive level, as well as intelligent and analytical review of the regular and detailed reporting our leases provide for.

The portfolio has once again delivered returns ahead of the MSCI UK Annual Healthcare Property Index, with a total return for the calendar year to December 2019 of 9.2 per cent relative to the Index's 7.4 per cent. The portfolio has consistently outperformed the Index since launch, as shown in the table below:

Supportive & collaborative portfolio management

During the year Orchard Care Homes, as part of a strategic review of their business, notified the Group of its intention to exit six leasehold homes, comprising 8.1 per cent of the Group's contractual rent at the time. We efficiently managed a process which resulted in two of the Group's tenants taking on the leases of the six homes, delivering no loss in income or capital value to the Group.

As well as being a clear endorsement of the Group's investment strategy whereby the asset and lease fundamentals are attractive to a range of operators, by acting as a responsible landlord we have facilitated an outcome which has minimised disruption to the residents and staff who live and work in our homes.

Two assets were sold during the year for proceeds ahead of book value, following a review of the long-term prospects for those assets when compared to the initial investment case.

Modernity & standard of real estate

We believe responsible investment in care homes should focus on intelligently designed, purpose-built care homes. These provide spacious private rooms and generous social space, including outdoor access for residents, with high standard amenities such as public and private dining, lifts and wide corridors which help our tenants provide care with operational efficiency.

Using en suite wet-rooms, which provide accessible and private facilities essential for personal hygiene and dignity, as a proxy for real estate standards across the portfolio, our beds are 95 per cent compliant. We have firm commitments to upgrade the balance, being legacy and identified as part of the acquisition process. The comparator for all care homes across the UK is 26 per cent.

Engaged

Care home real estate investment is not a practice which should be passive. The complexities require a detailed understanding of the real estate, trading/commercial performance, evolving market conditions, and the regulatory environment/scrutiny, amongst others.

During the year, we were continuing to visit each asset twice at a minimum, to complement our review and analysis of monthly data received from operators for each home. Following lockdown protocols being introduced across our portfolio in early March, we switched to entirely remote portfolio monitoring as we worked from home. During the period from 10 March to 31 August 2020 we engaged with our homes and tenants via c.700 phone/video calls, whilst continuing to collect and analyse detailed management information.

Dividend focus

Total dividends of 6.68 pence per share were paid in respect of the year, an increase of 1.5% on 2019, and reflecting a yield of 6.1 per cent based on the 30 June 2020 closing share price of 110.0 pence.

Earnings & dividend

Adjusted EPRA earnings per share, which management uses as a key metric to measure operational performance, decreased to 5.27 pence during the year. As a result, dividend cover also decreased to 76 per cent. With the more widely-used comparative of EPRA EPS of 6.92 pence per share, the dividend was fully covered.

Whilst the Group has been successful in completing investments during the year, £113 million of capital has been deployed since September's £80 million equity issuance, the temporary pause in activity due to COVID-19 and the full year effect of the higher dividend have both contributed to a decrease in dividend cover for the year. The increase in admin expenses to £9.5 million from £6.7million includes £2.1 million of provisions for doubtful rental income, also adversely impacting reported dividend cover. This amount is primarily in relation to two tenants across four homes: two of the homes were mature homes acquired at acquisition yields which reflected an increased level of risk and which are at present subject to asset management initiatives with good visibility of value recovery. The other two homes are immature and, whilst being behind budget, the operational performance was showing an improved trajectory prior to the impact of COVID-19. The Group remains confident that the real estate and commercial fundamentals of the homes are consistent with the initial investment case and expect to see positive returns in the medium-term.

Earnings summary

The Group's cost base is benefiting from the Group's increasing scale. OCF has reduced to 1.51% and whilst the EPRA cost ratios have increased, this is due to the calculation methodologies of these ratios classifying rental provisions as expense items. Excluding this effect, each ratio would have reduced from the prior year levels.

Total returns

The Group recognises total returns are important to shareholders, with much of the portfolio and Manager activity contributing to preserving capital values with potential for growth. Annualised NAV total return over the period since the Group's launch in March 2013 has been 7.7%, reflecting moderate levels of capital growth achieved on the portfolio from rental increases, asset management and market yield shift.

Balance sheet/debt

In the medium term, the Group targets a capital structure with gearing of approximately 25 per cent to achieve financial performance objectives at a suitable risk level for its portfolio and the asset class overall. Following the Group entering into its first long-term borrowing arrangement with an institutional lender, available facilities have increased to £180 million and additional funding certainty has been achieved with weighted average term more than doubling to 4.24 years.

The proportion of drawn debt incurring a fixed interest cost has increased to 53 per cent, and the overall cost of drawn debt has reduced to 2.87 per cent. The Group retains considerable flexibility through its debt portfolio, with £100 million of fully revolving facilities.

The Group will continue to focus on achieving competitively-priced debt at an appropriate duration.

Principal and emerging risks and uncertainties

Malcolm Naish

Chairman

5 October 2020

Viability Statement

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

The Board has conducted this review over a five-year time horizon, which is a period thought to be appropriate for a company investing in UK care homes with a long-term investment outlook. At each Board Meeting, the Directors consider the key outputs from a detailed financial model covering a similar five year rolling period, as this is considered the maximum timescale over which the  performance of the Group can be forecast with a reasonable degree of accuracy. The Group has a property portfolio at 30 June 2020 which has long leases and a weighted average unexpired lease term of 29.0 years. The Group has borrowings of £152.0 million, on which the interest rate has been fixed, either directly or through the use of interest rate swaps, on £80.0 million at 2.89 per cent per annum (excluding the amortisation of arrangement costs), and the remaining £72.0 million carries interest at three-month LIBOR plus a weighted margin of 1.64 per cent per annum (excluding the amortisation of arrangement costs). The Group has access to a further £28.0 million of available debt under committed loan facilities. The Group's committed loan facilities have staggered expiry dates with £50.0 million being committed to 1 September 2021, £80.0 million to 29 January 2022 and £50.0 million to 12 January 2032. Discussions with existing and/or new potential lenders do not indicate any issues with re-financing these loans on acceptable terms.

The Directors' assessment of the Group's principal risks are highlighted above. The most significant risks identified as relevant to the viability statement were those relating to:

·      Poor performance of assets. The risk that a tenant is unable to sustain a sufficient rental cover, leading to a loss of rental income for the Group;

·      Pandemic reduces demand for care home beds. The risk that 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

·      Debt finance. The risk that falls in property valuation or rental income from the portfolio reduce the Group's borrowing capacity, or that an increase in interest rates reduces net returns.

In assessing the Group's viability, the Board has considered the key outputs from a detailed model of the Group's expected cashflows over the coming five years under both normal and stressed conditions. The stressed conditions, which were intended to represent severe but plausible scenarios, included modelling increases in interest rates, movements in the capital value of the property portfolio and a significant default on rental receipts from the Group's tenants. The stressed level of default from the Group's tenants assumed in the financial modelling was based on a detailed assessment of the financial position of each individual tenant or tenant group, the structure in place to secure rental income (such as the strength of tenants' balance sheets, rental guarantees in place or rental deposits held) and included consideration of the potential financial impact on each tenant arising 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.

Consolidated Statement of Comprehensive Income (audited)

For the year ended 30 June 2020                                                                                                         

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.

Consolidated Statement of Financial Position (audited)

As at 30 June 2020

Consolidated Statement of Changes in Equity (audited)

For the year ended 30 June 2020         

For the year ended 30 June 2019

Consolidated Statement of Cash Flows (audited)

For the year ended 30 June 2020

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

In accordance with Chapter 4 of the Disclosure Guidelines and Transparency Rules, we confirm that to the best of our knowledge:

·      The financial statements contained within the Annual Report for the year ended 30 June 2020, of which this statement of results is an extract, have been prepared in accordance with applicable International Financial Reporting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      The Chairman's Statement, Investment Manager's Report, Strategic Objectives and Strategy in Action include a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

·      'Principal and emerging risks and uncertainties' includes a description of the Company's principal and emerging risks and uncertainties; and

·      The Annual Report includes details of related party transactions that have taken place during the financial year.

On behalf of the Board

Malcolm Naish

Chairman

5 October 2020

Extract from Notes to the Audited Consolidated Financial Statements

1.  Dividends

Amounts paid as distributions to equity holders during the year to 30 June 2020.

Amounts paid as distributions to equity holders during the year to 30 June 2019.

* Paid by the previous parent company of the Group, Target Healthcare REIT Limited. See note 14 for details on the Group reconstruction.

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 2020, of 1.67 pence per share, was paid on 28 August 2020 to shareholders on the register on 14 August 2020 amounting to £7,640,000. It is the intention of the Directors that the Group will continue to pay dividends quarterly.

2. Fee paid to the Investment Manager

The Group's Investment Manager and Alternative Investment Fund Manager ('AIFM') is Target Fund Managers Limited (the 'Investment Manager' or 'Target'). The Investment Manager is entitled to an annual management fee on a tiered basis based on the net assets of the Group as set out below. Where applicable, VAT is payable in addition.

Subsequent to its appointment as Company Secretary and Administrator to the Group with effect from 7 August 2019, the Investment Manager is entitled to an additional fee of £120,000 per annum plus VAT, increasing annually in line with inflation.

The Investment Management Agreement can be terminated by either party on 24 months' written notice, provided that the earliest that notice could be served is 30 April 2021. Should the Company terminate the Investment Management Agreement earlier then compensation in lieu of notice will be payable to the Investment Manager. The Investment Management Agreement may be terminated immediately without compensation if the Investment Manager: is in material breach of the agreement; is guilty of negligence, wilful default or fraud; is the subject of insolvency proceedings; or there occurs a change of Key Managers to which the Board has not given its prior consent.

3. Earnings per share and Net Asset Value per share

Earnings per share

There were no dilutive shares or potentially dilutive shares in issue.

EPRA is an industry body which issues best practice reporting guidelines and the Group report an EPRA NAV quarterly. EPRA has issued best practice recommendations for the calculation of certain figures which are included below.

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:

Net Asset Value per share

The Group's Net Asset Value per ordinary share of 108.0 pence (2019: 107.3 pence) is based on equity shareholders' funds of £494,113,000 (2019: £413,089,000) and on 457,487,640 (2019: 385,089,448) ordinary shares, being the number of shares in issue at the year-end.

The EPRA Net Asset Value ('EPRA NAV') per share is arrived at by adjusting the net asset value ('NAV') calculated under International Financial Reporting Standards ('IFRS'). The EPRA NAV provides a measure of the fair value of a company on a long-term basis. The only adjustment required to the NAV is that the EPRA NAV excludes the fair value of the Group's interest rate swaps, which were recognised as a liability of £227,000 under IFRS as at 30 June 2020 (2019: liability of £707,000).

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

EPRA guidance also recognises an EPRA NNNAV, the objective of which is to report net asset value including fair value adjustments in respect of all material balance sheet items which are not reported at their fair value as part of the EPRA NAV. At 30 June 2020, the Group held all its material balance sheet items at fair value, or at a value considered to be a close approximation to fair value, in its financial statements apart from its fixed-rate debt facility where the fair value of the liability is estimated to be £1,511,000 higher than the nominal value at 30 June 2020 (2019: £nil). See note 7 for further details on the Group's loan facilities.

4. Investment properties

Freehold and leasehold properties

The investment properties can be analysed as follows:

The properties were valued at £610,084,000 (2019: £500,884,000) by Colliers International Healthcare Property Consultants Limited ('Colliers'), in their capacity as external valuers. The valuation was undertaken in accordance with the RICS Valuation - Global Standards, incorporating the International Valuation Standards (the 'Red Book Global', 31 January 2020) issued by the Royal Institution of Chartered Surveyors ('RICS') on the basis of Market Value, supported by reference to market evidence of transaction prices for similar properties. Colliers has recent experience in the location and category of the investment properties being valued.

Market Value represents the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion. The quarterly property valuations are reviewed by the Board at each Board meeting. The fair value of the properties after adjusting for the movement in the fixed or guaranteed rent reviews and lease incentives was £570,086,000 (2019: £469,596,000). The adjustment consisted of £34,766,000 (2019: £27,535,000) relating to fixed or guaranteed rent reviews and £5,232,000 (2019: £3,753,000) 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'.

The Colliers' property valuation at 30 June 2020, in accordance with industry practice, was subject to a material uncertainty clause as follows:

"The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a "Global Pandemic" on the 11th March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries.

Market activity is being impacted in many sectors. As at the valuation date, we consider that we can attach less weight to previous market evidence for comparison purposes to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement.

Our valuation(s) is/are therefore reported on the basis of 'material valuation uncertainty' as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently, less certainty - and a higher degree of caution - should be attached to our valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuation of this portfolio under frequent review."

The RICS Material Valuation Uncertainty Leaders Forum (UK) reached consensus in early August 2020 that reporting material valuation uncertainty may no longer be appropriate for healthcare assets and therefore it is anticipated that the material uncertainty clause will be removed from the next valuation of the property portfolio which will be conducted as at 30 September 2020.

5. Properties held for sale

The properties held for sale were valued at £7,500,000 (30 June 2019: £nil) by Colliers International Healthcare Property Consultants Limited ('Colliers'). The properties held for sale consist of a block of apartments adjacent to an existing property holding which was acquired to consolidate ownership of the overall retirement village. The intention is to sell the leasehold on the individual apartments.

6. Investment in subsidiary undertakings

The Group included 46 subsidiary companies as at 30 June 2020 (30 June 2019: 29). 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, as well as establishing the new parent company (see note 14), the Group acquired eight new active property holding companies; THR Number 29 Limited, THR Number 30 Limited, THR Number 31 Limited, THR Number 32 Limited, THR Number 33 Limited, THR Number 34 Limited, THR Number 35 Limited and THR Number 36 Limited. These acquisitions were accounted for as Investment Property acquisitions. As part of these acquisitions, the Group acquired eight further companies which are currently dormant and which are expected to be liquidated shortly.

7. Bank loans

The Group has a £50.0 million committed term loan and revolving credit facility with the Royal Bank of Scotland plc ('RBS') which is repayable on 1 September 2021. Interest accrues on the bank loan at a variable rate, based on three-month LIBOR plus margin and mandatory lending costs, and is payable quarterly. The margin is 1.5 per cent per annum for the duration of the loan and a non-utilisation fee of 0.75 per cent per annum is payable on any undrawn element of the facility. As at 30 June 2020, the Group had drawn £50.0 million under this facility (30 June 2019: £50.0 million).

The Group has an £80.0 million revolving credit facility with HSBC Bank plc ('HSBC') which is repayable on 29 January 2022, with the option of a further one-year extension thereafter subject to the consent of HSBC. Interest accrues on the bank loan at a variable rate, based on three-month LIBOR plus margin and mandatory lending costs, and is payable quarterly. The margin is 1.70 per cent per annum for the duration of the loan and a non-utilisation fee of 0.75 per cent per annum is payable on any undrawn element of the facility.  As at 30 June 2020, the Group had drawn £52.0 million under this facility (2019: £22.0 million).

In January 2020, the Group entered into a new £50.0 million committed term loan facility with ReAssure which is repayable on 12 January 2032. Interest accrues on the loan at an aggregate fixed rate of interest of 3.28 per cent per annum, and is payable quarterly. As at 30 June 2020, the Group had drawn £50.0 million under this facility (30 June 2019: £nil).

During the year, the Group had a £40.0 million committed term loan facility with First Commercial Bank, Limited ('FCB'). Interest accrued on the bank loan at a variable rate, based on three-month LIBOR plus margin and mandatory lending costs, and was payable quarterly. The margin was 1.65 per cent per annum for the duration of the loan. The Group repaid the facility in January 2020 and the interest rate swap which had been entered into in order to hedge this facility was also closed out.

The following interest rate swaps were in place during the year ended 30 June 2020:

* The interest rate swap with FCB was closed out in January 2020 at the time of repayment of the related loan. The cost of such early redemption was recognised in capital.

Inclusive of all interest rate swaps, the interest rate on £80.0 million of the Group's borrowings is fixed, inclusive of the amortisation of arrangement costs, at an all-in rate of 3.13 per cent per annum until at least 1 September 2021. The remaining £100.0m of debt, of which £72.0 million was drawn at 30 June 2020, would, if fully drawn, carry interest at a variable rate equal to three-month LIBOR plus a weighted average lending margin, inclusive of the amortisation of arrangement costs, of 2.21 per cent per annum.

The fair value of the interest rate swaps at 30 June 2020 was an aggregate liability of £227,000 (30 June 2019: liability of £707,000) and all interest rate swaps are categorised as level 2 in the fair value hierarchy.

At 30 June 2020, the nominal value of the Group's loans equated to £152,000,000 (2019: £108,000,000). Excluding the interest rate swaps referred to above, the fair value of these loans, based on a discounted cashflow using the market rate on the relevant treasury plus an estimated margin based on market conditions at 30 June 2020, totalled, in aggregate, £153,511,000 (2019: £108,000,000). The payment required to redeem the loans in full, incorporating the terms of the Spens clause in relation to the ReAssure facility, would have been £165,974,000 (2019: £108,000,000) The loans are categorised as level 3 in the fair value hierarchy.

The RBS loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number One plc Group ('THR1 Group') which consists of THR1 and its two subsidiaries. The ReAssure loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number 12 plc Group ('THR12 Group') which consists of THR12 and its four subsidiaries. The HSBC loan is secured by way of a fixed and floating charge over the majority of the assets of the THR Number 15 plc Group ('THR15 Group') which consists of THR15 and its 18 subsidiaries (excluding those subsidiaries which are currently dormant). In aggregate, the Group has granted a fixed charge over properties with a market value of £496 million as at 30 June 2020.

Under the bank covenants related to the loans, the Group is to ensure that:

·      the loan to value percentage for each of THR1 Group and THR15 Group does not exceed 50 per cent;

·      the loan to value percentage for THR12 Group does not exceed 60 per cent; and

·      the interest cover, or equivalent, for each of THR1 Group, THR12 Group and THR15 Group is greater than c.300 per cent on any calculation date.

All bank loan covenants have been complied with during the year.

Analysis of net debt:

8. Share capital

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.

Under a scheme of arrangement, the parent company of the Group changed from Target Healthcare REIT Limited to Target Healthcare REIT plc on 7 August 2019. Under this scheme of arrangement, each shareholder received one share in Target Healthcare REIT plc for every one share previously held in Target Healthcare REIT Limited. After completion of the scheme of arrangement, the Company undertook a capital reduction. On 24 September 2019, the High Court confirmed the reduction of the nominal value of each of the 385,089,449 shares in issue from £1.00 to £0.01. The reduction in the share capital of £381,239,000 created the Group's distributable reserve. See note 14 for further details.

During the year to 30 June 2020, the Company issued a further 72,398,191 ordinary shares of £0.01 raising gross proceeds of £80,000,000 (2019: Target Healthcare REIT Limited, the previous parent company, issued 45,871,559 ordinary shares raising £50,000,000). The consideration received in excess of the par value of the ordinary shares issued, net of the expenses of issue of £1,824,000, has been credited to the share premium account.

During the year to 30 June 2020, the Company did not repurchase any ordinary shares into treasury (2019: nil) or resell any ordinary shares from treasury (2019: nil). At 30 June 2020, the Company did not hold any shares in treasury (2019: 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 Company is not subject to any externally-imposed capital requirements, other than the financial covenants on its loan facilities as detailed in note 7.

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 objectives, policies or processes during the year.

9. Financial instruments

Consistent with its objective, the Group holds UK care home property investments. In addition, the Group's financial instruments comprise cash, bank loans and receivables and payables that arise directly from its operations. The Group's exposure to derivative instruments consists of interest rate swaps used to fix the interest rate on the Group's variable rate borrowings.

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

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

Credit risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group. At the reporting date, the Group's financial assets exposed to credit risk amounted to £39,854,000 (2019: £31,057,000), consisting of cash of £36,440,000 (2019: £26,946,000), net rent receivable of £1,520,000 (2019: £602,000), accrued development interest of £996,000 (2019: £1,378,000) and other debtors of £898,000 (2019: £2,131,000).

In the event of default by a tenant if it is in financial difficulty or otherwise unable to meet its obligations under the lease, the Group will suffer a rental shortfall and incur additional expenses until the property is relet. These expenses could include legal and surveyor's costs in reletting, maintenance costs, insurances, rates and marketing costs and may have a material adverse impact on the financial condition and performance of the Group and/or the level of dividend cover. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Investment Manager monitors such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants. The expected credit risk in relation to tenants is an inherent element of the due diligence considered by the Investment Manager on all property transactions with an emphasis being placed on ensuring that initial rents are set at a sustainable level. The risk is further mitigated by rental deposits or guarantees where considered appropriate. The majority of rental income is received in advance.

As at 30 June 2020, the Company had recognised a credit loss allowance totalling £2,402,000 against a gross rent receivable balance of £3,922,000 and, whilst this balance has increased during the year ended 30 June 2020, it remains low relative to the Group's overall balance sheet. The provision relates primarily to two tenants where active asset management activities are being taken as described in the Chairman's Statement. As at 30 June 2019, the provision was £261,000, of which £261,000 is still outstanding. There were no other financial assets which were either past due or considered impaired at 30 June 2020 (2019: 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.

Over the course of the year, due to the quantum of cash balances held, counterparty risk was spread by placing cash across different financial institutions. At 30 June 2020 the Group held £36.4 million (2019: £26.5 million) with The Royal Bank of Scotland plc and £nil million with First Commercial Bank, Limited (2019: £0.5 million). During the year, monies were also held 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.

Interest rate risk

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

The Group's policy is to hold cash in variable rate or short-term fixed rate bank accounts. Interest is received on cash at a weighted average variable rate of 0.01 per cent (2019: 0.20 per cent). Exposure varies throughout the period as a consequence of changes in the composition of the net assets of the Group arising out of the investment and risk management policies. These balances expose the Group to cash flow interest rate risk as the Group's income and operating cash flows will be affected by movements in the market rate of interest.

The Group has £130.0 million (2019: £170.0 million) of committed term loans and revolving credit facilities which were charged interest at a rate of three-month LIBOR plus the relevant margin. At the year-end £102.0 million of the variable rate facilities had been drawn down (2019: £108.0 million). The fair value of the variable rate borrowings is affected by changes in the market rate of the lending margin that would apply to similar loans. The variable rate borrowings are carried at amortised cost and the Group considers this to be a close approximation to fair value at 30 June 2020 and 30 June 2019.

The Group has not hedged its exposure on £72.0 million of the variable rate borrowings at 30 June 2020 (2019: £42.0 million). On these loans the interest was payable at a variable rate equal to three-month LIBOR plus the weighted average lending margin, including the amortisation of costs, of 2.17 per cent per annum. The variable rate borrowings expose the Group to cash flow interest rate risk as the Group's income and operating cash flows will be affected by movements in the market rate of interest.

The Group has a £50.0 million fixed rate term loan (2019: £nil) and has hedged its exposure on £30.0 million (2019: £66.0 million) of the variable rate loans, as referred to above, through entering into fixed rate interest rate swaps. Fixing the interest rate exposes the Group to fair value interest rate risk as the fair value of the fixed rate borrowings, or the fair value of the interest rate swap used to fix the interest rate on an otherwise variable rate loan, will be affected by movements in the market rate of interest. The £50.0 million fixed rate term loan is carried at amortised cost on the Group's balance sheet, with the estimated fair value and cost of repayment being disclosed in note 7, whereas the fair value of the interest rate swaps is recognised directly on the Group's balance sheet. At 30 June 2020, an increase of 0.25 per cent in interest rates would have decreased the fair value of the interest rate swap liability and increased the reported total comprehensive income for the year by £0.1 million (2019: £0.4 million). The same movement in interest rates would have decreased the fair value of the fixed rate term loan by £1.2 million (2019: n/a); 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.

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.

10. Capital commitments

The Group had capital commitments as follows:

11. 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 £160,000 (2019: £177,000) of which £12,000 (2019: £19,000) remained payable at the year-end.

The Investment Manager received £5,264,000 (inclusive of irrecoverable VAT) in management fees in relation to the year ended 30 June 2020 (2019: £4,702,000). Of this amount £1,364,000 (2019: £1,162,000) remained payable at the year-end. The Investment Manager received a further £129,000 (inclusive of irrecoverable VAT) during the year ended 30 June 2020 (2019: £nil) in relation to its appointment as Company Secretary and Administrator, of which £35,000 (2019: £nil) 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.

12. Operating segments

The Board has considered the requirements of IFRS 8 'Operating Segments'. The Board is of the view that the Group is engaged in a single segment of business, being property investment, and in one geographical area, the United Kingdom, and that therefore the Group has only a single operating segment. The Board of Directors, as a whole, has been identified as constituting the chief operating decision maker of the Group. The key measure of performance used by the Board to assess the Group's performance is the EPRA NAV. The reconciliation between the NAV, as calculated under IFRS, and the EPRA NAV is detailed in note 3.

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.

13. Contingent assets and liabilities

As at 30 June 2020, ten (2019: nine) properties within the Group's investment property portfolio contained deferred consideration clauses meaning that, subject to contracted performance conditions being met, deferred payments totalling £18.03 million (2019: £18.75 million) may be payable by the Group to the vendors/tenants of these properties. The potential timings of these payments are also conditional on the date(s) at which the contracted performance conditions are met and are therefore uncertain.

Having assessed each clause on an individual basis, the Company has determined that none of these deferred consideration  clauses are more likely than not to become payable in the future and therefore an amount of £nil (2019: £nil) has been recognised as a liability at 30 June 2020. It is highlighted that the potential deferred consideration would, if paid, result in an increase in the rental income due from the tenant of the relevant property. As the net initial yield used to calculate the additional rental which would be payable is not significantly different from the investment yield used to arrive at the valuation of the properties, any deferred consideration paid would be expected to result in a commensurate increase in the value of the Group's investment property portfolio.

As part of the sale agreements in relation to the two properties sold in July 2019, the Group may receive further proceeds from these sales should either property be re-sold prior to 18 July 2021 for a price above a pre-determined level.

14. Significant events: corporate reconstruction

On 21 June 2019, Target Healthcare REIT Limited ("Original THRL") announced proposals to change the Group's corporate structure by establishing Target Healthcare REIT plc ("New THRL" or "the Company") a new English-incorporated parent company (registration number: 11990238), at the head of the Group. The Board believed that moving the Group's ultimate parent company to a UK domicile would align the Group with its UK tax jurisdiction, maintain and enhance its important relationships with UK local authorities and health services and help to reduce some of the Group's administration costs and regulatory complexities which arose due to the requirement to operate in both Jersey and the UK.

The proposal, which required the approval of Original THRL's existing shareholders and the Royal Court of Jersey, was effected by way of a scheme of arrangement under article 125 of the Companies (Jersey) Law 1991 pursuant to which the Company acquired Original THRL and became its ultimate parent company. The Company replicates all of the existing arrangements and structure of Original THRL. It has, for example, the same management, depositary and corporate governance arrangements alongside having the same investment, gearing and dividend policies. The Company is also a REIT for the purposes of UK taxation.

The scheme of arrangement was approved by shareholders at meetings held on 18 July 2019 and, following the agreement of the Royal Court of Jersey, became effective on 7 August 2019. Original THRL's existing shareholders received one new share in the Company for every share they held in Original THRL at close on 6 August 2019. The Ordinary Shares of the Company were admitted to the premium segment of the Official List and to trading on the main market of the London Stock Exchange on 7 August 2019.

The scheme of arrangement gave rise to the issuance of 385,089,448 Ordinary Shares in the Company with a nominal value of £1 each. The shares were issued at a deemed fair value of 112.4 pence per share, which was the market price of the shares of Original THRL as quoted on the London Stock Exchange immediately prior to the completion of the scheme of arrangement. The difference between the aggregate fair value and the aggregate nominal value, which constitutes the amount eligible for merger relief under section 612 of the Companies Act 2006, has been credited to the merger reserve. The difference between the fair value of the shares issued and the stated capital account of Original THRL immediately prior to the completion of the scheme of arrangement has been offset against the distributable reserve.

After completion of the scheme of arrangement, the Company undertook a capital reduction. On 24 September 2019, the High Court confirmed the reduction of the nominal value of each of the 385,089,449 shares in issue from £1.00 to £0.01, creating a distributable reserve of £381,239,000.

A breakdown of the merger and distributable reserves at 30 June 2020 are shown below:

* Being the interim dividends for the year ended 30 June 2020 paid by the Company before it has had sufficient time to build up its own revenue reserve.

15. Post balance sheet events

Subsequent to the year end, the Group has acquired a new-build care home in Bicester, Oxfordshire for a consideration of £15 million inclusive of costs. The high quality, 66 bed, purpose-built asset is let to Ideal Carehomes, the Group's largest tenant, on a 35-year, fully repairing and insuring, occupational lease which includes annual, upwards-only RPI-linked increases, subject to a cap and collar.

In addition, practical completion on the development of an 80-bed care home in Burscough, Lancashire was achieved in July 2020. The home was completed under a forward-fund arrangement pre-let to Athena Healthcare, an existing tenant of the Group, at a cost of £10 million, on a 35-year lease with RPI-linked increases, subject to a cap and collar.

16. Financial statements

This statement was approved by the Board on 5 October 2020. It is not the Company's full statutory financial statements in terms of Section 434 of the Companies Act 2006. The statutory annual report and financial statements for the year ended 30 June 2020 has been approved and audited and received an unqualified audit report which did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report. The statutory annual report and financial statements for the year to 30 June 2020 will be posted to shareholders in October 2020 and will be available for inspection at Level 13, Broadgate Tower, 20 Primrose Street, London, EC2A 2EW, the registered office of the Company.

The statutory annual report and financial statements will be made available on the website: www.targethealthcarereit.co.uk. Copies may also be obtained from Target Fund Managers Limited, Laurel House, Laurelhill Business Park, Stirling FK7 9JQ.

The audited financial statements for the year to 30 June 2020 will be lodged with the Registrar of Companies following the Annual General Meeting to be held on 2 December 2020.