Long-term growth and near-term resilience

Impact Healthcare REIT 19 June 2020 Initiation
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Impact Healthcare REIT

Long-term growth and near-term resilience

Initiation of coverage

Real estate

19 June 2020

Price

100p

Market cap

£319m

Net cash (£m) at 31 December 2019

22.7

Gross LTV at 31 March 2020
(maximum c 18% if all committed transactions completed)

6.8%

Shares in issue

319.0m

Free float

94%

Code

IHR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.5

59.4

(14.1)

Rel (local)

(1.4)

27.7

1.1

52-week high/low

114p

62p

Business description

Impact Healthcare REIT, traded on the main market of the London Stock Exchange, invests in a diversified portfolio of UK healthcare assets, particularly residential and nursing care homes, let on long leases to high-quality operators. It aims to provide shareholders with attractive and sustainable returns, primarily in the form of dividends, underpinned by structural growth in demand for care.

Next events

Half-year end

30 June 2020

Analyst

Martyn King

+44 (0)20 3077 5745

Impact Healthcare REIT is a research client of Edison Investment Research Limited

UK care home demand is driven by a growing elderly population with increasing care needs rather than by the economy. In the face of COVID-19, the operational performance of Impact’s tenants has thus far been reassuring with no impact on rent collection or quarterly DPS, and we expect no material effect on the positive long-term fundamentals. Indeed, by highlighting the essential role that the sector performs, the pandemic may have the positive effect of permanently improving resident funding.

Year end

Net rental income (£m)

EPRA earnings* (£m)

EPRA
EPS*(p)

EPRA NAV/
share (p)

DPS
(p)

P/NAV/
share (x)**

Yield
(%)**

12/18

17.3

12.4

6.47

102.9

6.00

0.97

6.0

12/19

24.0

17.6

6.95

106.8

6.17

0.94

6.2

12/20e

30.4

22.6

7.08

108.7

6.29

0.92

6.3

12/21e

35.3

26.5

8.30

112.2

6.40

0.89

6.4

Note: *EPRA earnings exclude fair value movements on properties and interest rate derivatives. **P/NAV and yield are based on the current share price.

Solid fundamentals

Impact continues to build its portfolio of UK care homes, increasing asset and tenant diversification, and generating economies of scale. The growing asset base with long triple net leases, no break clauses and upwards-only, annual inflation-linked rent increases supports a clear and progressive dividend policy, linked to rental growth, and a total return target of 9% pa. Across the sector, the COVID-19 pandemic is having a profound impact, although infection rates have slowed. Operator performance has been mixed and while Impact’s tenants are not unaffected, operational performance has thus far been reassuring and Impact has received all rents due to the end of June 2020. Entering the pandemic, the average financial performance of Impact’s tenants was strong (2019 rent cover of 1.8x with little or no external debt), while the company itself has low gearing, good liquidity and significant access to undrawn debt.

Core income with asset management potential

Impact’s business model is built around long-term partnerships with a growing list of selected tenant operators, investing alongside them in suitable properties that they can operate efficiently, providing a good quality of care, to sustain a growing stream of long-term rental income. The portfolio has been built mainly through portfolio acquisitions, often less competitive, with attractive yields at acquisition typically and consistently in the range of 7.5%. The diverse portfolio mainly comprises a majority core of good-quality, upper-middle-market homes alongside value-add assets where there is potential, working in partnership with tenants, to upgrade/extend facilities and reposition homes in their local markets. Asset management benefits residents and operators, and offers enhanced returns on a pure ‘buy and hold’ strategy.

Valuation: DPS growth linked to rental uplifts

Impact targets aggregate DPS of 6.29p in FY20 (+1.9%), barring a material COVID-19 impact on rent collection, representing an attractive yield of 6.3% while the c 6% discount to NAV compares with an average 3% premium since IPO (peak of 11%).

Investment summary

Company description: Income enhanced by asset management

With existing capital resources, Impact is well positioned for further portfolio growth and diversification, targeting attractive and sustainable returns, mainly in the form of quarterly dividends. Its external specialist investment manager brings considerable experience of the UK care home market, of particular benefit in the sourcing of acquisitions and the selection of tenants. The portfolio has been built mainly through portfolio purchases, often less competitive, with acquisition yields maintained at an attractive c 7.5%. The assets mainly comprise a majority core of good-quality, upper-middle-market homes alongside value-add assets that offer tenant-driven asset management opportunities with potential for low-risk enhancement of returns beyond that available from a pure ‘buy and hold’ strategy. A continuation of successful operator performance combined with long, upwards-only, inflation-linked leases promises a high-quality, sustainable and growing income stream to support dividends. Further, Impact believes upper-middle-market homes, serving both the local authority and private markets, would likely benefit most from increased government funding for elderly care compared with the high end of the private pay market.

Financials: Robust cash flows

Our income growth forecasts assume completion on exchanged assets and an additional £50m of acquisitions by mid-FY21 (fully utilising existing debt facilities) and RPI-linked rent growth of 2% pa. We expect DPS growth to follow rent indexation and implicitly assume full collection of contracted rents (no material COVID-19 deferral), with DPS currently well covered by EPRA EPS and full cover by adjusted EPS (excluding all non-cash items) by FY21. Our sensitivity analysis (page18) highlights Impact’s ability to maintain a good level of distributions, albeit at a lower level, even with fairly significant COVID-19 deferral of rents. Our acquisition assumptions increase gearing (LTV) to a modest c 25% at end-FY21 from c 18% currently (assuming completion of all commitments).

Valuation: DPS growth linked to rental uplifts

Based on RPI-linked rental growth achieved in FY19, the FY20 DPS target is 6.29p (+1.9%) barring a material COVID-19 impact on rent collection or other unforeseen circumstances, representing a yield of 6.3%. The company’s total return target of 9% pa includes the potential for capital growth (driven by rental growth and asset management opportunities). The total return was 9.5% in FY19 and has averaged 8.1% pa since its March 2017 IPO (9.0% if adjusted for acquisition costs incurred in growing the portfolio). Our forecasts indicate a 7.7% total return in FY20 and a little over 9% pa in FY21–22. Compared with a peer group of other companies targeting stable long-term income (page 19), Impact shares have a higher than average yield and trade at a P/NAV discount of c 6%, having traded fairly consistently at premium since IPO (average 3% and 11% high) until COVID-19.

Sensitivities

We see the key sensitivities (detailed on page 21) as relating to the following:

The potential for regulatory changes or changes to government care policy.

The ability of tenants to meet their long-term contractual rent obligations, which in turn is dependent on factors including their ability to maintain regulatory compliance and a good quality of care, and increase fees sufficiently to meet cost pressures, especially staff costs.

The COVID-19 pandemic represents an additional pressure on care home operators.

The tenant base is increasingly diversified, but we note that the Minster Care Group (Minster and Croftwood), with a long track record of profitable operation, represents c 51% of the rent roll, down from 100% at IPO.

Company description

Impact Healthcare REIT (Impact) invests in a portfolio of primarily residential and nursing care home assets in the UK, diversified by geography, tenant operator, home size and resident funding mix. Although the company’s investment policy allows for investment in a broad range of healthcare real estate assets, the company has identified the care home sector as offering the most attractive opportunity. The demand for care home places is driven by the ongoing demographic shift to an ageing population with more complex care needs rather than the economic cycle, and despite a growing population of elderly the number of care homes is lower today than it was in the late 1990s. Of the 94 assets owned at 31 March 2020, 92 are residential and nursing care homes and two are co-located complementary healthcare facilities leased to the NHS, and we firmly expect the care home sector to remain the focus of Impact’s further growth.

Impact aims to provide shareholders with attractive and sustainable returns, primarily in the form of quarterly dividends by focusing on the quality of the buildings in which it invests, the care delivered by its tenant operators and the cash flows that this generates. The company is externally managed by a sector specialist investment manager (Impact Health Partners or IHP) whose principals bring considerable experience of investment and operation in the UK care home market and wider alternative asset markets, of particular benefit in the sourcing of acquisitions and selection of tenants. The principals of IHP collectively own more than 3% of Impact shares, closely aligning the interests of the investment manager, company and shareholders.

Impact’s business model is focused on forming long-term relationships with selected tenants, investing in suitable properties that can be efficiently operated alongside a good quality of care, providing predictable, good-quality cash flows to support dividend growth. The company seeks opportunities to further grow the portfolio alongside existing and new tenants, providing increased asset and tenant diversification, and generating economies of scale. Impact prefers less competitive portfolio acquisitions, often off-market, and the portfolio has been built with attractive yields at acquisition typically and consistently in the range of 7.5% (before costs) compared with the EPRA net initial yield of 6.7%. The diverse portfolio mainly comprises a majority core of good-quality, upper-middle-market homes serving both the local authority and private markets, alongside value-add assets where there is potential, working in partnership with tenants, to upgrade/extend facilities and reposition homes in their local markets. Asset management benefits residents and operators and offers enhanced risk-adjusted returns relative to a pure ‘buy and hold’ strategy. Currently agreed asset management projects (including those already completed) represent capex of £24m and are set to add almost 300 additional beds and more than £2.0m in additional rent roll, generating a yield of more than 8% pa on the capital deployed.

Impact’s shares were listed on the Main Market of the London Stock Exchange on 7 March 2017 raising £160.2m through an IPO and vendor issue, enabling the company to acquire an immediately income generating seed portfolio for c £149m. The shares were initially listed on the Specialist Fund segment before being admitted to the Premium Listing segment on 8 February 2019. From IPO to end-FY19, Impact had generated an aggregate NAV total return (change in NAV plus dividends paid, but not reinvested) of 24.6% or a compound annual return of 8.1%. Dividends paid accounted for two-thirds of the aggregate return and capital growth for the balance.

Having met its initial post-IPO DPS targets, in early 2019 the company introduced a clear and progressive dividend policy, as part of a wider NAV total return target of 9% pa. Under this policy, Impact targets dividend growth in line with the inflation linked rental uplifts received in the preceding financial year, with a dividend target for FY20 of 6.29p per share, a 1.94% increase over the 6.17p declared in FY19, barring any material COVID-19 impacts on rent collection (all rents due to end-June 2020 have been collected) or other unforeseen circumstances. A Q120 DPS of 1.5725p has been declared for payment on 12 June 2020.

At 31 March 2020, the portfolio was externally valued at £345.1m with an annualised contracted rent roll of £29.2m and a weighted average unexpired lease term (WAULT) of 19.8 years. The 92 care home assets (ie excluding the two healthcare facilities leased to the NHS) were let to nine tenants on fixed-term leases of 20 to 25 years with no break clauses and subject to annual upwards-only RPI-linked rent reviews (capped at 4% pa with a floor at 2% pa). Portfolio growth since IPO has been funded by equity issuance and a modest level of borrowing. The gearing policy specifies a maximum 35% gross loan to value (LTV) ratio and at 31 March 2020 it was 6.8% (c 18% assuming completion of all committed transactions).

Exhibit 1: Steadily growing assets and rental income since IPO

Exhibit 2: Growing DPS, fully covered by EPRA earnings

Source: Impact Healthcare REIT data

Source: Impact Healthcare REIT data

Exhibit 1: Steadily growing assets and rental income since IPO

Source: Impact Healthcare REIT data

Exhibit 2: Growing DPS, fully covered by EPRA earnings

Source: Impact Healthcare REIT data

COVID-19 update

Significant COVID-19 impact on the operator market

The COVID-19 pandemic continues to have a profound impact on a great many care home residents, their friends and families, and those who care for them, although positively the number of infections and recorded deaths has been on a declining trend since the beginning of April. While it poses a significant additional near-term business challenge to the care home operators, given the underlying drivers of care home demand and supply we do not expect a material impact on the fundamental case for investment in the sector. Over the medium term, by highlighting the essential service that the sector provides and the critical role that it plays in supporting the NHS, the pandemic may even help to crystallise long-debated reform of the care funding model and thereby help to unlock much needed investment. The focus of this initiation report on Impact is on the group’s strategy and the longer-term investment case, but given the current circumstances we begin with an update on the near-term impacts of the COVID-19 pandemic.

Exhibit 3: COVID-19 deaths in England & Wales by place of death

Source: Office of National Statistics (ONS)

The spread of COVID-19 throughout UK care homes has been widely reported on in the press. However, the patchiness of testing, especially in the early weeks of the pandemic, has handicapped precise analysis. ONS data up to 29 May 2020 show that of the c 44k COVID-19 deaths recorded in England & Wales, more than 13k, or c 31%, were recorded as having taken place in care homes. However, the spike in overall deaths compared with normal levels indicates that the overall effect has been much greater. Since the first care home resident death was recorded, total deaths have been roughly twice as high as in the same period of 2019. Encouragingly, the most recent data appear to indicate a slowdown in both the rate of infections, mortality, and excess mortality compared with normal levels.

Increased near-term cost pressures for the operators

The pandemic presents a significant near-term challenge to operators as they strive to maintain the best quality of care and protect the safety and wellbeing of their residents and staff, and while efficient implementation of infection controls may mitigate the risks posed by COVID-19, it is far from being any guarantee of success. Staffing is a key challenge for care operators in normal times and maintaining adequate staff levels during the COVID-19 outbreak has been a key concern. Staff members showing signs of infection have been required to remain at home in self-isolation for two weeks, while residents who are put into isolation, either through infection or upon newly entering a home, require additional staff resources. Recent indications are that these staff pressures are easing as those who have been in self-isolation return to work. There have also been reports of increasing job applications across the sector as a result of displacement from other employment. In addition to staff pressures, there has been widespread reporting of the shortage and high cost of personal protective equipment (PPE) facing many operators. While the NHS has been striving to utilise all available care home capacity for suitable elderly patients who would otherwise be forced to remain in hospital beds, the operators must balance their efforts to assist with their duty to provide effective care to existing residents. Some operators have been able to safely accommodate hospital transfers while providing suitable quarantine protection for existing residents, sometimes in otherwise empty buildings, but there have clearly been many cases when this has not been adequately managed, speeding the spread of the virus. Where infection and/or death occurs, there is likely to be a temporary downward pressure on available beds and an increase in occupancy for the operators.

Financial support available for operators

In recognition of the critical role that the care industry plays in providing for the care of vulnerable elderly people and relieving pressures on the hospital system, the government has quickly made additional funding available. In April 2020, the government announced £3.2bn of additional funding for local authorities in response to the additional costs placed on them by the coronavirus outbreak, and their partners, to be allocated at their discretion across a range of services including social care. This is a material addition to the c £23bn of annual spending on social care by local authorities, of which c £10bn relates to care for the elderly. This was followed in May 2020 by the provision of an additional £600m of government funding, of which 75% is targeted directly at care homes to mitigate the cost impact of infection control measures. In addition, if care home operators with sustainable business models are materially financially affected by COVID-19 despite these measures, we would expect landlords to provide temporary assistance by spreading rental payments over a longer period. As we note below, to date this has not been the case with any of Impacts’ tenants.

The longer-term effects of the pandemic on the operator market are difficult to predict. As we discuss in the following sections, fundamentally the market requires more beds not fewer, although the trend towards fewer, smaller providers, and an increasing share for mid-market operators (the majority of Impact tenants) seems likely to accelerate.

Reassuring early feedback from Impact’s tenants

Identifying tenant partners that are most likely to provide good levels of care while operating a sustainable and profitable business is the foundation of Impact’s investment strategy. Entering the pandemic, all of Impact’s tenants were profitable, with little or no debt, and with average rent cover across the portfolio of 1.8x (FY19). Around 90% of rents are received quarterly in advance and c 10% monthly in advance. To date, there has been no impact on rent collection and the company has received all rents due up to 30 June 2020.

The investment manager continues to be in regular contact with all tenants and key service providers to monitor how the pandemic is affecting them and, where appropriate, to promote the sharing of information and best practice ideas among them. During the pandemic, tenants have been asked to provide a weekly situation report and weekly occupancy data as a supplement to the detailed monthly operating and financial data that they provide at the end of each quarter.

Impact provided an update on the early feedback from tenants in its 7 May 2020 trading statement and will continue to provide updates on material developments as the pandemic evolves. The 7 May statement shows a robust performance thus far with encouraging indications that operational pressures are easing. Over the eight weeks between the week ending 6 March 2020, in which the first COVID-19 related death was registered in the UK, and the week ending 1 May 2020, information from tenants indicates that the average number of portfolio beds occupied reduced by 173, from 4,225 to 4,052, or c 4%. Tenants reported an easing of staffing pressures with PPE and testing kits for staff and residents becoming more available.

We discuss Impact’s funding strategy in detail on page 17, but during the current pandemic it has deliberately maintained low gearing with a good level of liquidity and significant borrowing headroom from available debt facilities.

Impact comments that despite ongoing uncertainty as to the impact and duration of the pandemic, the company continues to be well positioned for the uncertainties that lie ahead. It has conducted a detailed viability assessment for a range of scenarios and has concluded that under each of these it would have adequate cash resources to maintain operations and meet all of its liabilities that fall due over the next five years.

Income sensitivity analysis

Despite the company’s strong balance sheet position, the robust performance of tenants to date, and clear signs of improvement in infection rates and the number of deaths, uncertainty remains as to the full impact of the COVID-19 pandemic, which is likely to remain an evolving situation for some time.

Our dividend forecasts are driven by the stated dividend policy and implicitly assume that Impact will continue to collect contracted rents in full without material deferral. In our view, this seems a sensible assumption based on current trends and evidence but, should this not be the case, our analysis on page 18 suggests that Impact would be able to maintain a good level of quarterly distributions, albeit at a lower level, even with fairly significant deferral of rental income. However, should any of the tenant operators be more seriously affected by the pandemic, there is a risk of a more significant cash flow impact with implications for near-term dividend payments. In the extreme case of tenant failure, there would potentially be an impact on reported earnings as well as cash flow, resulting from potential bad debts, loss of income and potential delays in re-tenanting with associated costs.

It is too early to anticipate what impact the pandemic may have on property valuations across the broad property sector and for the care home sub-sector. There was no apparent impact on property valuations in Q120 with a £2m valuation uplift driven by RPI-linked rental growth. However, the external valuation was subject to the material uncertainty clause that has become an industry standard, with a dearth of transactions to provide evidence of market values. It is encouraging to note that in the supported housing sector, Triple Point has recently indicated that as a result of timely rent collections and a continuing level of investment activity in the sector, it no longer considers that there is material uncertainty when valuing specialised supported housing.

Management and fees

Impact Healthcare REIT is closely overseen by a non-executive board of directors and is externally managed, under a management contract, by Impact Health Partners LLP (‘IHP’ or ‘the investment manager’). The investment manager sources investments and makes recommendations to the board, carries out transactions approved by the board, monitors the progress of the homes and provides portfolio management services to the company. It also recommends the asset management strategy for board approval and subsequent implementation. In the FY20 annual report the board notes that in the period since IPO it has been deeply involved in all business decisions, especially capital investment and acquisitions, but that it feels that it is now time to delegate more decision-making to the investment manager, within clearly defined limits, leaving the board free to focus on more strategic guidance and major business decisions. The framework for this delegated authority is due to be formalised during 2020.

The investment manager and fees

IHP was established in September 2016 by its principals, Mahesh Patel and Andrew Cowley, who collectively bring considerable experience of investment and operation in the UK care home market and wider alternative asset markets. Mahesh Patel owns 10m shares in the company (c 3%) through Maal Limited and other members of the IHP team own c 0.3%, which closely aligns the interests of the investment manager, company and shareholders.

Mahesh Patel is a qualified accountant who has over 30 years’ experience in healthcare-related industries and assets, including positions in finance and other healthcare related industries including dental, prosthetics and children’s nurseries. Specifically, in the field of elderly care, prior to the establishment of Impact Health Partners he had previously built up and then sold three healthcare-related businesses, Highclear and Kingsclear (focused on residential care for the elderly) and a supported living business, Independent Living. In addition, he established the elderly residential healthcare groups Minster and Croftwood, which provided the initial seed portfolio in a sale and leaseback transaction at IPO (see page 12), becoming Impact’s initial tenants.

Andrew Cowley is an experienced fund manager, who has been investing in infrastructure and private equity since 2000, including the successful acquisition of, and exit from, a UK care home business. During this period he served as a senior managing director at Macquarie and deputy chief executive of Macquarie Airports, listed on the Australian Stock Exchange. Before this, he was a managing director at Allianz Alternative Assets, responsible for €6.5bn of investments in alternative assets and initiated Allianz’s investment into infrastructure.

David Yaldron joined IHP as finance director in June 2017.

Investment management fees are set at 1% pa on average net assets up to £500m, reducing to 0.7% pa on average net assets of more than £500m, increasing the benefit to shareholders from continuing growth in the portfolio.

Although net assets are yet to cross the £500m level, economies of scale were evident in FY19 with the EPRA cost ratio reducing to 19.2% from 24.7% in FY18 (or to 18.4% from 20.6% adjusted for one-off costs) while the total expense ratio (TER) reduced from 1.8% to 1.6%.

Independent non-executive board

The independent non-executive chairman of the board is Rupert Barclay, managing partner of Cairneagle Associates LLP. He is a chartered accountant with almost 30 years’ experience as a strategy consultant specialising in strategic decision support for companies and private equity firms, and extensive non-executive board experience. The other non-executive directors of the company bring broad experience in the real estate sector, and specifically healthcare real estate, finance and capital markets, social housing, and corporate stewardship and governance. They are Rosemary Boot (senior independent non-executive director), with extensive corporate, board and finance experience including as executive director and strategy adviser at the large housing association, Circle Housing Group; Amanda Aldridge, a former audit and advisory partner at KPMG (with a focus on quoted companies including clients with significant property portfolios) and experienced board member, including the property management, development, and regeneration company Places for People Group; Paul Craig, portfolio manager at Quilter Investors (a 17.0% shareholder in Impact) with more than 20 years’ of investment experience; and Philip Hall, director of Debden Healthcare Consultancy (and previously chairman for healthcare at JLL), a chartered surveyor with more than 25 years’ experience in the healthcare sector in the UK and internationally. Philip Hall is author of ‘The Valuation of Care Homes: Principles into Practice’ (2008). Other than Paul Craig, who represents the company’s largest shareholder, all of the non-executive directors are considered independent.

The company has an indefinite life, but shareholders will be invited to vote on continuation at five-yearly intervals, with the first vote scheduled for 2024.

Strong long-term sector growth drivers

The demand for residential care is driven by demographic and health trends rather than being directly linked to economic conditions. While it is possible that the COVID-19 pandemic may have a short-term impact on the demand for care home places or possibly slow the rate at which available rooms can be safely occupied, these longer-term structural trends suggest that the need for elderly residential care will continue to increase for a great many years. Existing estimates by the Office of National Statistics (ONS) indicate that the number of people in the UK aged 85 or older will double by 2041, from c 1.6 million to c 3.2 million, and the COVID-19 pandemic is unlikely to change this basic direction of travel. Currently, around 15% of those aged over 85 require specialist care and for this to be adequately provided the options are effectively hospital or a care home. Meanwhile, the number of residential and nursing home beds in the UK has in recent years failed to keep pace with this growing need and has declined from a peak of 563,000 in 1996 to 466,000 in 2018, with new development offset by the withdrawal of obsolete homes from the market, often driven by the requirement for higher care standards. Much of the new care home development is focused on geographical areas with supportive demographics and which can support a high share of self-funded residents such as the South-East and South-West.

As local authorities have substantially withdrawn from the operation of residential care homes it will largely fall to the private sector, both for profit and not-for-profit, to meet this growing need. However, while the private sector is the dominant provider of care, accounting for c 90% of all beds, local authorities remain a significant provider of funding for care home residents, accounting for c 50% of the total, either in full or with some top-up from residents and their families. Given the pressures on local authority funding and increasing demand, there is a widespread recognition of the need to find a long-term funding solution for social care in the UK if the challenges and opportunities presented by an ageing population are to be met. Longer-term funding for adult social care continues to be debated publicly, along with closer co-operation between health and social care. A government Green Paper exploring the options was originally due in 2017 but has been delayed several times and there is no indication that it will be produced in short order. The prime minister had promised a new set of social care proposals this year and while this too may be delayed, the current pandemic can only highlight further the critical role that the care industry plays in providing for the care of vulnerable elderly people and relieving pressures on the hospital system.

Private care providers have experienced sustained growth

Across the industry, this combination of growing demand, shrinking supply and the shift from local authority to private sector provision continues to generate sustained, above-inflation growth in revenues and average weekly fees for the operators. LaingBuisson estimates that over the past 20 years average weekly fees to private sector operators have increased at an average c 3.7% pa (compared with average increases in RPI of 2.8%) with £16.5bn being spent on care of the elderly in care homes in 2019. Factors contributing to this rise in fees include rising staff and property costs, increasingly complex medical and care needs (including rising levels of dementia), higher standards of care required by the regulator, and growth in the private pay market driven by customer choice and the shrinking pool of those eligible for public funding.

However, above-inflation fee growth over the past five to six years has not kept pace with industry-wide pressures from staff costs, staff shortages and regulatory pressures to improve standards of care. Industry profitability margins have trended lower, although performance is mixed across the sector. Given the pressures on local authority funding and the significant pricing power that they exercise, in general there is a clear differential between local authority-funded fees compared with the fees paid by self-funded residents. In many cases, the local authority fees paid are insufficient and are effectively cross-subsidised by higher-paying self-funding residents. While a balance of resident funding is desirable, operators that rely too heavily on local authority-funded residents have been more likely to struggle with cost pressures and this is more so if the homes that they operate are older, often converted and poorly configured. If the current pandemic does indeed accelerate changes to the social care model and provide additional long-term funding, it should be beneficial to the profitability of local authority-funded care home places. Conversely, homes at the very high end of the market and fully reliant on high fee-paying privately funded residents may in certain economic circumstances struggle to maintain the above average fee growth of recent years. For all operators, post Brexit immigration proposals introduced by the government in January 2020 appear to have the potential to increase staff shortages, while the April 2020 6.2% increase in the National Living Wage, the largest ever annual increase, will add to staff costs, typically around 60% of care home operating costs.

The UK care home operator market is varied and fragmented and getting more so. The top 10 providers (c 21% of the total market) have seen an erosion in share as some of the largest groups, often private equity owned, struggle with heavy debt burdens. At the opposite end of the market single home operators, accounting for around one-third of the stock or c 4,600 properties, have also been in decline, in many cases operating from older, adapted properties that can present additional challenges to the provision of good-quality care. It is mid-sized groups with between three and 80 homes that is driving overall market growth, and this is the segment where most of Impact’s tenants are active. While the challenges facing the wider industry, and particularly the problems experienced by some of the largest and some of the smallest operators, inevitably receive a great deal of media attention, the ability of well-managed operators, with efficiently run homes in locations with a good demand-supply balance, to profitably and sustainably provide good-quality care is often overlooked.

Impact strategy: Growing high-quality, sustainable cash flows

Impact’s strategy for delivering its investment objectives and delivering sustainable long-term value is built off the following three pillars of strong tenants in suitable properties driving high-quality sustainable cash flows with capital appreciation potential:

The quality of the buildings Impact owns. As we discuss below, the portfolio is diversified but at its core a significant majority of the properties are good-quality, well designed, upper-middle-market care homes, in good condition and viable for the term of the existing leases at the very minimum. Most of the balance of the portfolio is classified as value-add, with the potential, working in partnership with tenants, to physically enhance and reposition the properties within their local markets.

The quality of care that its tenants provide. The security of the long-term contractual rental streams is highly dependent on selecting tenants with the ability to provide good quality care to support sustainable profitability. The investment manager’s deep sector knowledge supports tenant selection and ongoing engagement and monitoring.

The quality of cash flows this generates. Well performing operators, providing good levels of care from suitable buildings is the foundation for generating high-quality sustainable cash flows. This is supported by careful monitoring of tenants’ financial performance as well as operating performance, especially in respect of their ability to grow revenues in line with or ahead of inflation, maintain good levels of profitability, and hence maintain or grow rental cover. At the corporate level, Impact looks to control costs and generate economies of scale from portfolio growth while maintaining a disciplined approach to capital allocation.

Since IPO, Impact has significantly grown and diversified its portfolio, maintaining high acquisition yields (c 7.5%) while improving overall asset quality (EPRA net initial yield 6.7%). The tenant base has been substantially diversified, all profitable, with no external debt and generating a good level of rental cover (1.8x in FY19). Rental income has followed asset growth, cost ratios have improved, and dividends have grown.

Long-term relationships are at the core of this strategy

A strong and detailed knowledge of the tenants’ operations and the UK healthcare market is at the core of the model and guides the selection of property acquisitions as well as the identification of asset management opportunities to create additional value for both the tenant and company. Impact seeks long-term relationships with its growing list of selected tenant operators, investing alongside them in suitable properties that they can operate efficiently and provide a good quality of care. In return this should provide Impact with a sustainable and growing stream of rental income with which to meet its investment objectives. There are five clear stages to the process of strategy implementation:

Identifying suitable care providers with which to build long-term relationships. It is expected that the tenants will be running the homes that Impact invests in for at least 20 years, and the first stage of the process is to identify those that are most likely to provide good care, while running a sustainable and profitable business that generates a secure rental stream well covered by earnings. Impact looks for tenants with strong balance sheets, preferably with little or no debt, with experience of home improvement and ambitions to grow. As we note on page 8, the investment manager brings significant sector experience and existing industry/operator relationships, which we believe is highly beneficial in assessing potential operators.

Identifying suitable assets to acquire in partnership with those operators. Impact seeks to acquire homes that its existing or proposed tenant operators would run well by jointly reviewing their existing portfolios or identifying homes owned by third parties where there is an opportunity to create value for both the operator and the company. Impact prefers portfolio acquisitions as although there has been strong investment demand in the sector there are relatively fewer bidders for these, often helping it to achieve a better valuation. However, it may buy single homes either to add to an existing tenant portfolio or with a strategy to acquire more homes with a new tenant. The investment manager’s sector knowledge and relationships with vendors can provide access to less competitive off-market transactions and supports a careful but swift assessment of potential acquisitions.

Rigorous due diligence on selected investments. Homes selected for investment are subject to a thorough due diligence process combining an in-depth assessment of the operator and its quality of care, as well as ensuring that the homes are sound and align with the company’s investment objectives, and an assessment of the local supply-demand balance. Where the assets selected for investment are currently operating below their potential, the measures required to improve performance are identified in advance.

Working closely with tenants to create sustainable long-term value. Ensuring that it has a detailed knowledge of each tenant’s operations enables Impact to work with them to identify asset management opportunities that can create value for them and for the company. In most cases these may include adding additional beds or enhancing communal space to broaden the appeal of the home and is additional to regular repair and maintenance expenditure undertaken by the tenants at their own expense under the terms of the triple net leases. Asset management projects are designed to enhance tenant revenues, increase rents and improve capital values.

Optimising the portfolio to enhance long-term shareholder value. Impact regularly reviews the portfolio to ensure that it remains comprised of properties that are effective and efficient for the company, contributing towards achievement of the investment objectives, and the operators. As we discuss in the portfolio section below, where it is value enhancing for shareholders, the company may seek to agree with the operator to sell a home and recycle the proceeds into more attractive opportunities.

Portfolio growth and diversification

Significant growth and diversification since IPO

Since IPO, Impact’s aim has been to build its portfolio, increasing asset and tenant diversification and generating economies of scale. At the end of March 2020 (Q120) the portfolio was externally valued at £345.1m (subject to the industry standard material uncertainty clause reflecting a lack of near-term transactional pricing evidence), and comprised 94 properties (92 residential care and nursing homes and two co-located NHS facilities), fully let to nine care home operators (10 tenants including the NHS), and providing almost 5,000 beds. Assuming completion on the properties on which contracts have been exchanged (‘exchanges’) and including the remaining commitment to complete the pre-let forward funded asset, we estimate a current portfolio value of £397.5m with the number of properties increased to 104, the number of beds to more than 5,600, and the number of tenants to 11 (including the NHS). The pre-let forward-funded asset and the exchanges are included in Impact’s published end-Q120 contracted rent roll of £29.2m. All of the care homes let on long and fixed-term triple net leases (the tenant is responsible for all maintenance expenditure and insurance costs), with annual upwards-only, RPI-linked rent increases with a floor of 2% pa and capped at 4% pa. Impact’s standard leases include covenants in respect of minimum rent cover, minimum maintenance expenditure, and standards of care. The initial term of the Minster, Croftwood and Welford leases (c 58% of end-FY19 contracted rental income) is 20 years, an efficient length in terms of the rate of land transfer tax applicable to corporate acquisitions. The initial term of all other care home leases is 25 years and all care home tenants have options to extend their leases by an additional 10 years. The two NHS facilities have remaining terms of c three years and c six years, indexed to CPI, and over the medium term, working in partnership with the NHS, Impact believes there is asset management potential for both. The weighted average unexpired lease term of the whole portfolio (excluding extension options) was 19.8 years at end Q120.

Exhibit 4: Summary of portfolio

31-Dec

31-Mar

Pro-forma: including exchanges & forward funding

FY19

Q120

Completed properties

86

94

104

o/w care homes

84

92

102

Beds

4,274

4,898

5,642

Annualised contracted rent (£m)

23.1

25.2*

29.2**

Number of tenants

9

10

11

WAULT (years)

19.7

19.8

N/A

Portfolio valuation (£m)

318.8

345.1

397.5***

Source: Impact Healthcare REIT, Edison Investment Research. Note: *31 March 2020 contracted rent excludes from Impact published figure the £0.5m in respect of the forward funding asset. **Pro-forma contracted rent includes £3.5m in respect of the exchanges and £0.5m impact of the forward funding asset. ***31 March valuation adjusted for exchanges (£47.5m) and estimated remaining forward funding commitment (£4.9m).

Minster and Croftwood were the initial tenants

Impact came to market in March 2017 with an agreement to acquire a significant number of assets (the seed portfolio) from its initial tenants, Minster Care and Croftwood Care, both part of the Minster Care Group. The seed portfolio, comprising 56 residential care homes, offering c 2,500 beds, let to the initial tenants for an initial term of 20 years (with an option to extend for two further 10-year periods) was acquired in May 2017 for c £149m. The blended net initial yield on the two portfolios was 7.6%. Not only did the seed portfolio enable Impact to quickly invest the net IPO proceeds and avoid cash drag, it generated immediate income with rental payments received from the date of the IPO with adjustment for the interest received on cash balances until completion. This enabled Impact to meet its initial post-IPO target of paying aggregate quarterly dividends of 6.0p in the first full year (FY18), a yield of 6% on the 100p issue price.

Minster was established by Mahesh Patel, one of the principals of the investment manager, in 2004 following the successful sale of prior healthcare related businesses. He also helped to found and grow Croftwood from 2009. He continues to be an investor in and director of the Minster Care Group. The seed portfolio represented substantially all the (59) homes operated by the Minster Care Group at the time of the Impact IPO, spread across England, Scotland and Wales. As an established operator the group was able to present a 10-year track record of profitable growth and following the transaction became free of all external debt. Recognising the potential for conflicts of interest between the investment manager and the initial tenants, a detailed agreement exists to manage these, overseen by the board. This provides additional safeguards on top of the c 3% ownership in Impact by the principals of the investment manager, aligning interest with the company and shareholders. The agreement covers a range of potential situations but, importantly, it includes set minimum repair and maintenance capex to be undertaken by the tenants and minimum rental cover levels with procedures to deal with any breach. As with the broad portfolio the leases with Minster and Croftwood are all full repairing and insuring and subject to upwards only annual RPI-linked increases, guaranteed by the Minster Care Group. Minster Care Group’s last filed accounts for the 12 months ended March 2019 show revenues on its 62 homes (nearly all leased from Impact) increasing to c £79.5m, including a 5.3% like-for-like increase, and EBITDA of £4.3m. The group had no external bank borrowings and cash of £5.6m and generated net positive cash flow in the year.

Exhibits 5 and 6 show Impact’s progress in diversifying its tenant base from the end of FY18, its first full year of trading, to the present. Management continually stresses that the target is not simply to add more tenants, but to add selected quality tenants with which to partner over the long term. As a result of this process, the share of contracted rent roll accounted for by Minster and Croftwood has declined from 100% shortly after IPO to c 51% currently.

Exhibit 5: Current* contracted rent roll by tenant

Exhibit 6: End-FY18 rent roll by tenant

Source: Impact Healthcare REIT. Note: *Includes nine care home portfolio in Scotland on which contracts have been exchanged.

Source: Impact Healthcare REIT

Exhibit 5: Current* contracted rent roll by tenant

Source: Impact Healthcare REIT. Note: *Includes nine care home portfolio in Scotland on which contracts have been exchanged.

Exhibit 6: End-FY18 rent roll by tenant

Source: Impact Healthcare REIT

Robust tenant operating performance

Tenants provide detailed monthly operating and financial data at the end of each quarter and the investor manager regularly visits homes. This enables Impact to ensure that tenants are complying with their covenants and meeting the minimum repair and maintenance expenditure specified within the leases (usually indexed to inflation and based on a three-year average spend) and should provide an early warning of any emerging issues. In such circumstances, the investment manager’s sector knowledge can be utilised to engage with tenants and support their operations, while individual property leases at the level of each home, reinforced by a master lease (‘framework agreement’) with each tenant, ensures all lease terms are enforceable. Penalties may be applied if rent cover falls below agreed levels (typically in the form of advance rental payments) and Impact has the ability to remove poorly performing tenants even where the rent has been paid in full.

All of the tenants were profitable with little or no debt and average rent cover across the portfolio in FY19 was 1.8x, defined in accordance with the industry standard as each tenant’s earnings before interest, depreciation, amortisation, rent and management charges divided by rent (EBITDARM/rent).

In addition to its own ‘real time’ tenant review process, Impact also reviews the results of the assessments carried out by the industry regulator (in the case of England, the Care Quality Commission or CQC). Using data collected at 4 March 2020, Impact had 78.9% of homes rated good or outstanding compared with the national average (for homes of more than 30 beds) of 77.5%. Care is needed in interpreting this data as while it provides useful insights into operator performance the inspection timetable (typically every 18 months or so) can often lead to delays in ratings adjusting to material changes, such as a new operator, new standards of practice or a change in the home manager.

Exhibit 7: CQC ratings

Impact

CQC average (homes in England with more than 30 beds)

Outstanding

7.2%

4.8%

Good

71.7%

72.7%

Requires improvement

20.5%

20.7%

Inadequate

1.2%

1.8%

Source: Impact Healthcare REIT. Note: As at 4 March 2020.

Growth focused on upper-middle market homes

Portfolio growth has been achieved primarily through portfolio acquisitions, often less competitive and off-market, at attractive yields, consistently in the range of 7.5% before costs (we estimate a c 7.1% net initial yield after costs) compared with the EPRA net initial yield of 6.7%, itself reflecting capital value gains since acquisition. In recent years there has been strong investor demand for care home properties, driven by the visible income growth nature of the assets. However, Impact has maintained acquisition yields into the current year, with capital deployed year to date at an average yield on net purchase price of c 7.5%, and we expect this to be the case going forward.

Exhibit 8: Consistent yields on acquisition*

Source: Impact Healthcare REIT. Note: *Net yield, defined as rental income at acquisition dividend by purchase price (before acquisition costs).

Meeting the dual dividend growth and total return targets requires a balance to be struck between high-quality core assets that generate attractive, secure, long-term income, and value-add assets with the potential to create further value through asset management. Core and value-add assets represent c 95% of the portfolio by value with non-core assets, candidates for disposal and recycling into more attractive investment opportunities representing the balance. At end-FY19 the portfolio was split as follows:

Core assets are the primary contributors to long-term, stable income and accounted for 69.0% of the end-FY19 portfolio value. They are good quality buildings, requiring little or no investment, with a stable trading performance underpinning a sustainable level of rent cover, and an expected useful life that is greater than the duration of the leases.

Value add assets are candidates for tenant-driven asset management initiatives and accounted for 26.3% of the end-FY19 portfolio value. They present opportunities to deploy additional capital to enhance the asset and its performance in a way that creates value for both the tenant and Impact. Typical candidates may be smaller homes and/or with a low level of en-suite bathrooms or other elements of functional obsolescence. Larger homes may benefit from investment that would enable them to offer a new service such as dementia care or other facilities that may increase their appeal to the private fee-payer market.

Non-core assets may be candidates for sale and accounted for 4.7% of the end-FY19 portfolio value (and a larger 9.3% measured by the total number of properties). These assets are most likely to have been acquired as part of larger portfolio acquisitions and may have a limited lifespan because of a high degree of functional obsolescence or they may be geographically isolated and are likely to have a higher alternative use value.

Impact describes the significant majority core assets as addressing the upper-middle market segment of the care home market. There are no hard and fast definitions of market segmentation, which is often described in terms of yield and capital values. At the very highest end of the market (‘super-prime’), yields in the range of 4% have been typical, representing a capital value of c £350k per bed and requiring the support of a high level of fees that can only be achieved with privately funded resident base. Below this are ‘prime assets’ with yields of perhaps 4.5–5.0% and capital values of c £200,000 per bed. At the low end of the market yields have been closer to 9% with capital values often determined by the potential for alternative use. We estimate that on average the capital value per bed for Impact core portfolio at end-FY19 was c £90k with an estimated c £60k per ‘value-add’ bed, highlighting the upside potential. Reflecting the impact of the seed assets, the current portfolio retains a bias towards the northern regions of the UK where property values are typically lower than in the south.

In its chosen market segment, Impact’s tenants have been able to offer value for money and provide good levels of care, while operating profitably with a strong average level of rent cover (1.8x), and despite having a slightly above industry average share of publicly funded residents. Across the portfolio at the end of 2019 c 64% of residents were wholly or partly publicly funded (mostly by local authorities but also by the NHS in respect of nursing care) and c 34% privately funded. Including top-up payments (private contributions in addition to public funding) the privately funded share would be c 40%.

The investment manager anticipates that in the immediate aftermath of the pandemic, upper-middle market homes, serving both the local authority and private markets, are more likely to benefit from potential increases in long-term government funding for elderly care compared with the pure private-fee paying segment at the higher end of the market.

Asset management core to portfolio management strategy

Impact considers asset management to be one of the most attractive strategies available to it for the deployment of capital and for enhancing returns beyond a pure ‘buy and hold’ strategy. Unlike ‘physical’ asset management in the mainstream commercial property sector, which often involves the landlord taking advantage of or engineering a void period in which to reposition the property with the aim of increasing its attractiveness, income potential and valuation when subsequently re-let, for Impact it is led by the tenants, identifying and agreeing with Impact projects that can create value for both parties. Tenants benefit from the potential to enhance or extend facilities, broaden their appeal to residents, and increase earnings. Impact benefits from higher rents and improved rental cover, with the potential for capital appreciation. We consider the risks to be low compared with speculative or greenfield development. The financial arrangements for Impact’s funding of capex are set out in the framework agreements that are in place with tenants and currently agreed projects (including those already completed) are set to generate a yield of more than 8% pa on the capital deployed, an enhancement of anticipated pure ‘buy and hold’ returns.

Exhibit 9 shows the asset management schemes that have been approved by the board since IPO. In total, these amount to more than £24m of capex, adding almost 300 additional beds and more than £2.0m in additional rent roll. When complete and fully operational there is the potential for capital value uplift. Two recently completed significant projects are at Diamond House, Leicester and Freeland House, Oxfordshire, both involving the development of new specialist dementia care facilities. Both will offer care to existing residents of the home who develop dementia symptoms and require more support, and will also provide places for new residents with dementia needs. The additional facilities at Diamond House, designed and furnished to provide the optimum environment for dementia care, and providing 30 additional beds, all with en-suite wet rooms, have been operating since March 2020. The 46 additional dementia care beds at Freeland House, designed to the same high standard, are complete and awaiting CQC registration.

Exhibit 9: Asset management projects and pipeline

Home

Tenant

Capex (£m)

Net beds added

Additional rent (£’000)

Status

Project

Projects completed before 2019

Turnpike

Croftwood

0.92

25

78

Completed

Conversion of closed supported living unit to care beds

Littleport

Minster

2.17

21

185

Completed

Development of new dementia unit

Ingersley

Croftwood

0.2

12

16

Completed

Conversion of closed supported living unit to care beds

Parkville II

Prestige

2.17*

38

188

Completed

Conversion of closed building to new dementia unit

Sub-total

5.46

96

467

Projects completed or commenced in 2019

Garswood

Croftwood

1.10

11

106

Completed

Reconfiguration and extension

Diamond House

Minster

2.65

30

228

Completed

Development of new dementia unit

Freeland

Minster

4.85

46

403

Underway

Development of new dementia unit

Loxley

Croftwood

0.50

4

48

Ready to start

Reconfiguration and extension

Old Prebendal House

Careport

0.75

N/A

60

Underway

Reconfiguration and extension

Various

Minster

0.69

6

55

Underway

Enhancement of day spaces and bathrooms

Sub-total

10.54

97

900

Approved projects planned to start in 2020

Hartlepool

Prestige

6.10

94

475

Underway

Forward funding of new home

Fairview

Welford

2.35

10

195

Awaiting planning

Linking two existing units

Sub-total

8.45

104

670

Total

24.45

297

2,037

Source: Impact Healthcare REIT

Recent examples of acquisition and asset management strategy

In addition to the existing approved asset management projects referred to above, including the recent completions of significant projects at Freeland House and Diamond House, in this section we provide some examples of investment strategy as reflected in recent acquisition activity. In August 2019, Impact acquired two care homes for a net purchase price of £12.9m and an initial rent of £950k, representing a yield of 7.4%. The transaction added both a core, good-quality income generating 55-bed home (Baylham Care Centre, near Ipswich, rated outstanding at the time of acquisition) alongside a second established 44-bed home (Barham Care Centre), with a good care rating, and offering the potential for refurbishment and extension, as well as a new tenant to the group, Optima Care, a specialist health and social care provider, founded in 2004. Optima continues to operate the homes on new 25-year fixed-term leases including Impact’s standard lease terms with annual upwards-only RPI-linked rent increases. Impact is now working with Optima on a feasibility study to consider asset management options and looks to grow the number of homes with Optima over the coming years.

Exhibit 10: Balham Care Centre

Exhibit 11: Diamond House

Source: Impact Healthcare REIT

Source: Impact Healthcare REIT

Exhibit 10: Balham Care Centre

Source: Impact Healthcare REIT

Exhibit 11: Diamond House

Source: Impact Healthcare REIT

In March 2020, Impact completed the acquisition of three homes in Bradford from Victorguard Care for a net purchase price of £7.5m, also committing £0.3m to capital expenditure, with an initial rent of £630k, representing a yield of 8.1%. Operation of the homes has transferred from Victorguard to Silverline Care, a new tenant to the group, on new 25-year fixed-term leases including Impact’s standard lease terms with annual upwards-only RPI-linked rent increases. Silverline successfully operates other homes in Yorkshire and has plans in place to improve the performance of the acquired homes, which had suffered under the previous operator despite the properties having been built to a high standard with all 182 bedrooms en-suite. Impact says the acquisition price of c £41k per bed reflects the trading performance under the previous operator and not their expected potential.

Also in March 2020, Impact announced the exchange of contracts to acquire a portfolio of nine care homes in Scotland for a net purchase price of £47.5m with an initial rent of £3.5m, reflecting a yield of 7.4%. Completion of the transaction is expected shortly (it is included in our forecasts) once regulatory approval from the Scottish Care Inspectorate has been received. The vendor is Holmes Care Group, which will continue to operate the homes (a new tenant to the group) on new 25-year fixed-term leases including Impact’s standard lease terms with annual upwards-only, RPI-linked rent increases. Following completion, Holmes will have no external debt and the initial rent cover was more than 2x. Impact was able to secure this off-market transaction as a result of the investment manager’s deep knowledge of the UK care home market and strong industry relationships.

Financials

Recent trading shows portfolio continuing to grow and perform as expected

In April 2020, Impact reported results for the year ended 31 December 2019 (FY19) showing continued strong growth in the portfolio, rent roll and earnings. The portfolio value increased 42%, the contracted rent roll by 30% to £23.1m, and cash rental income (before IFRS smoothing adjustments in respect of fixed rent uplifts and lease incentives) by 38% to £19.1m. Cost growth lagged income growth reflecting economies of scale and EPRA earnings increased 42% to £17.6m. The EPRA cost ratio reduced to 19.2% from 24.7% in FY18 (or to 18.4% from 20.6% adjusted for one-off costs) while the total expense ratio (TER) reduced from 1.8% to 1.6%.

The company measure of adjusted earnings, aimed at tracking underlying cash earnings, excludes non-cash IFRS smoothing adjustments and other non-recurring items (in FY19 £171k of fees related to the migration to the premium segment of the LSE, and in FY18 £742k of abortive transactions costs). The adjusted earnings increase of 33% to £13.0m was less than the EPRA increase due to larger IFRS effects in the year.

Earnings per share was held back by the issue of equity to fund portfolio growth (£100m in May at 106p per share and £35m in December 2019 at 108p per share). EPRA EPS increased c 7% to 6.9p and adjusted EPS by just under 1% to 5.1p. The capital increase proceeds are now deployed but are yet to be fully geared with debt drawings while acquisitions contributed for only part of the period.

The increased DPS in respect of FY19 of 6.17p was 113% covered by EPRA earnings and 83% by adjusted earnings.

Property revaluation of c £13.9m (reported in the income statement net of IFRS smoothing adjustments) and NAV were driven by rent increases (£6.2m), uplifts resulting from capital improvements (£2.3m) and uplifts arising on acquisition and from yield compression of £5.4m. EPRA NAV per share increased 3.7% to 106.8p and including DPS paid during the year the accounting total return was 9.5%, ahead of the 9% pa target.

Exhibit 12: Summary of FY19 financial performance

£m unless stated otherwise

FY19

FY18

FY19/FY18

IFRS

EPRA adj

EPRA earnings

IFRS

EPRA adj

EPRA earnings

EPRA earnings

Cash rental income

19.1

19.1

13.9

13.9

37.8%

IFRS rent smoothing adjustments

4.9

4.9

3.4

3.4

Gross & net rental income

24.0

0.0

24.0

17.3

0.0

17.3

38.5%

Administrative and other expenses

(4.6)

(4.6)

(4.3)

(4.3)

7.5%

Op. profit before change in fair value of inv. prop.

19.4

0.0

19.4

13.0

0.0

13.0

48.7%

Change in fair value of investment properties

9.1

(9.1)

0.0

4.1

(4.1)

0.0

Operating profit

28.5

(9.1)

19.4

17.2

(4.1)

13.0

48.7%

Net finance expense

(2.1)

0.4

(1.7)

(0.7)

0.1

(0.6)

194.1%

Profit before and after tax

26.3

(8.7)

17.6

16.5

(4.0)

12.4

41.8%

Company specific earnings adjustments:

IFRS rent smoothing adjustments

(4.9)

(3.4)

Non-recurring expenses

0.2

0.7

Adjusted earnings

13.0

9.7

32.9%

Other data:

IFRS EPS (p)

10.4

8.6

EPRA EPS (p)

6.9

6.5

7.3%

Adjusted EPS (p)

5.1

5.1

0.6%

DPS declared (p)

6.17

6.0

DPS cover (EPRA earnings)

113%

108%

DPS cover (adjusted earnings)

83%

84%

Investment properties

318.8

223.8

42.4%

Gross debt

25.1

26.0

Gross LTV

6.8%

11.4%

Net assets

340.7

198.3

Closing shares in issue (m)

319.0

192.2

EPRA NAV per share (p)

106.8

102.9

3.7%

Source: Impact Healthcare REIT

Since reporting FY19 results, in addition to updating on continuing full rental collection for Q120 and April and the effects of the COVID-19 pandemic on its tenant operators, Impact has reported the following in respect of Q120:

A Q120 DPS of 1.5725p, in line with the 6.29p DPS target for the FY20 year.

An unaudited increase in NAV to £341.2m or 106.98p.

Growth in the property portfolio valuation to £345.1m including acquisition completions, capex and a £2.0m revaluation gain driven by RPI-linked rental uplifts.

Growth in the annualised rent roll (including exchanges and the forward funding asset) to £29.2m driven by acquisitions and rental growth.

Collection in full of all rents due up to 30 June 2020.

Continued low gearing with good levels of liquidity and significant borrowing headroom (see below). The LTV of 6.8% at end-March 2020 increases to a maximum c 18% assuming completion of all investment commitments.

Summary of key forecasting assumptions

Our forecasts include the acquisitions that have completed year to date as well as completion (assumed end-H120) of the nine-home Scottish portfolio for which contracts have been exchanged (and the c £3.5m pa contracted rent included in the end-Q120 rent roll). Given the strong funding position, we firmly expect acquisitions to resume at some point and assume an additional £50m in acquisitions, commencing in late 2020 and completing by mid-FY21. Our key forecasting assumptions include:

£10m in acquisitions at end-FY20, £20m at end-Q121 and £20m at end Q221. We assume a 7.5% yield on consideration (consistent with the historical trend shown in Exhibit 8) and, allowing for acquisition costs (assumed at 5%), a net initial yield of 7.1%.

Anticipated completion of the Hartlepool forward-funded development (contracted rental income £475k pa included in the end-Q120 contracted rent roll) at end-FY20, contributing to FY21 rental income.

Annual asset management capex of £3.0m pa.

Annual RPI rental uplifts of 2.0% pa.

Contracted rents are assumed to be received in full with no COVID-19 related deferrals or waivers and we provide a sensitivity analysis to rent deferral below.

A full impact from FY19 acquisitions, a part-year contribution from FY20 acquisitions and rental growth generates a 32% increase in FY20 cash rental income and 20% growth in FY21. With only a small acquisition impact in FY22 from FY21 acquisitions, the growth rate slows to 5%.

Investment management fees are calculated as per the investment management fee schedule (1% on assets up to £500m). Other expenses are assumed to grow by c 2.5% pa on an underlying basis, slightly ahead of the like-for-like rental growth assumption in recognition of the growing size of the company.

We expect revaluation movements to continue to be driven by rental growth and asset management initiatives in combination with ‘buying well’. We allow for existing asset valuations to increase in line with our rental growth assumption, for an uplift on asset management investment and for the yields on acquired assets to migrate towards the portfolio average over time. In FY20 and FY21 this is partly offset by acquisition costs written off. The impact of COVID-19 is difficult to anticipate at this stage and our assumptions imply no underlying change in market valuation yields. We estimate that a 0.1% decrease or increase in market yields would increase or decrease NAV per share by c 1.5p per share.

Exhibit 13: Income statement revaluation movement

£m

FY19a

FY20e

FY21e

FY22e

Gross revaluation movement

17.8

12.7

11.6

9.9

Acquisition costs written off

(3.9)

(4.0)

(1.9)

0.0

Net revaluation movement

13.9

8.7

9.7

9.9

IFRS rental smoothing adjustment

(4.9)

(5.1)

(4.9)

(4.7)

Gains/(losses) on revaluation of investment properties as per income statement

9.1

3.6

4.8

5.2

Acquisition costs as % purchase value

5.5%

5.0%

5.0%

N/A

Gross revaluation as % opening portfolio value

7.9%

4.0%

2.8%

2.1%

Gross revaluation gain per share (p)

5.0

5.6

4.0

0.0

Source: Impact Healthcare REIT historical data, Edison Investment Research forecast

Our forecast for net interest expense increases in line with drawn borrowings, partly offset by the reduced marginal cost of borrowing reflected in the most recent debt facilities (see below) and in FY20 by no repeat of the c £0.4m negative mark-to-market interest rate-derived movement (excluded from EPRA and adjusted earnings) in FY19. As we discuss below, we have assumed £99m of additional borrowing by end-H120, fully utilising existing debt facilities. Our forecast 25.5% end-FY21 net LTV remains modest and well below the 35% limit that Impact has set itself.

We forecast a 28% increase in EPRA earnings in FY20 and 7% growth in FY21, with EPRA EPS increasing 2% in FY20 to 7.1p and 17% in FY21 to 8.3p. With a smaller IFRS rent smoothing impact, we expect adjusted earnings and EPS to grow at a faster rate. On this basis, increasing DPS continues to be well covered by EPRA EPS and fully covered by adjusted EPS in FY21. We forecast EPRA NAV per share to increase by 2% to 108.7p in FY20 and by 3% to 112.2p in FY21.

Financial flexibility with low LTV and material borrowing headroom

Impact has entered the COVID-19 pandemic with low gearing, good liquidity, material borrowing headroom on existing agreed debt facilities and no debt maturities before 2023. This puts the company in a strong position to manage any near-term risks posed by COVID-19 and to grow the portfolio further when it considers this to be appropriate.

Including the new £50m revolving credit facility with HSBC announced in early April 2020, Impact has £125m of committed banking facilities comprising a £25m term loan facility and £100m of more flexible revolving credit facilities (RCF). At the end of Q120 a little over £25m of the debt facilities had been drawn with £84.4m of the £98.9m undrawn facilities immediately available (with the balance subject to additional security injections). Including £25.0m of cash, the loan to value ratio (LTV) was 6.8% (calculated as debt divided by gross assets). Assuming the completion of all of the existing committed transactions, amounting to c £49m and increasing drawn debt to c £75m, the gross LTV would increase to a maximum 18% and substantial borrowing headroom would remain. Our forecasts assume that acquisitions recommence in late FY20 and that all the existing debt facilities are fully drawn by the end of FY21. Our forecast net LTV at end-FY21 is 25.5%. Meanwhile, the new HSBC facility provides additional access to liquidity on attractive terms and provides an opportunity to optimise the use of the flexible RCF facilities so as to manage borrowing costs.

Exhibit 14: Summary of debt portfolio

Lender

Facility type

Facility (£m)

Maturity

Margin

Interest cover covenant

Propco LTV covenant

Metro Bank

Term loan/RCF

50.0

Jun-23

Base rate +2.65%

200%

35%

Clydesdale Bank

RCF

25.0

Mar-24

Libor +2.25%-2.50%

325%

55%

HSBC

RCF

50.0

Apr-23*

Libor +1.95%

250%

55%

Total facilities

125.0

Source: Impact Healthcare REIT data. Note: *HSBC facility includes option of up to two-year extension subject to HSBC approval.

All of the debt is secured against specific non-recourse security pools (‘Propcos 1-4’) with no cross defaults. Based on drawings of £75m, Impact expects to have £51m of unencumbered assets outside of the security pools and estimates that asset values would need to fall by more than 50% before breaching LTV covenants and rent receipts by more than two-thirds before breaching interest cover covenants.

We estimate the average maturity of the debt facilities at c 3.5 years with an average cost of c 2.5% (based on three-month Libor at 0.3%). To mitigate the interest rate risk of the variable rate borrowing, Impact has hedged £25.0m, until June 2023, with an interest rate cap that protects against a rise in Libor above 1%.

Income sensitivity

Our dividend forecasts are driven by our expectations for growth in RPI-indexation of care home contracted rents, in line with Impact’s dividend policy, and implicitly assume that most or all contracted rent continues to be received in full. However, should any of Impact’s tenants be materially financially affected by the COVID-19 pandemic our analysis suggests that even with fairly significant deferral of rental payments it would be possible for the company to maintain a good level of quarterly distributions, albeit at a lower level based on the reduced near-term cash flows. In the extreme case of tenant failure, we would expect a negative earnings impact as rental income is lost and not simply deferred, reflected in bad debts, lost income and potential delays in re-tenanting with associated costs.

In Exhibit 15 we illustrate the potential near-term sensitivity of DPS and DPS cover from rent deferral. We have made the analysis on an adjusted earnings basis, better reflecting actual underlying cash earnings. For simplicity, we have assumed any rents deferred to be a deduction from forecast income and adjusted earnings, although in most cases this is likely to be a cash flow impact (the timing of collections, in most cases temporary) rather than an income impact (the amount of rent to be collected over time). We have modelled the sensitivity based on our FY21 forecasts, which include a full contribution from recent acquisitions. A 10% reduction in our forecast FY21 rental income reduces dividend cover from the forecast 106% to 91%. From an alternative perspective, if targeting 100% dividend cover, the implied FY21 DPS with a 10% reduction in rental income would be 5.82p rather than our forecast 6.40p.

Depending on the nature and expected duration of any shortfall in near-term rental receipts, the company may decide to use existing financial resources to support distributions.

Exhibit 15: Illustrative impact of rent deferral on near-term DPS and DPS cover (on an adjusted earnings basis)

Rental income v forecast:

Implied dividend cover

Implied DPS at full cover (p)

Forecast/0%

1.06

6.78

-1%

1.04

6.68

-3%

1.01

6.49

-5%

0.98

6.30

-10%

0.91

5.82

-15%

0.84

5.35

-20%

0.76

4.87

-25%

0.69

4.39

Source: Edison Investment Research

Valuation

As noted above, Impact has a progressive dividend policy and has increased annual aggregate DPS each year since IPO and is targeting a further 1.9% increase in the current year. The FY20 DPS target of 6.29p represents a prospective yield of 6.3% while the P/NAV discount of 6% (using the last reported, end-FY19 EPRA NAV per share of 106.8p) compares with an average premium of 3% since IPO. As Exhibit 16 shows, the shares traded at a consistent premium (reaching a high of 11% in H219) until COVID-19 began to spread widely, but have since recovered much of the ground temporarily lost. Were the shares to return to an 11% premium to NAV, this would imply a still attractive prospective dividend yield of 5.3%. Such a move in the share price would provide support for raising additional non-dilutive capital and support further accretive portfolio growth.

Exhibit 16: Price to NAV ratio history since IPO

Source: Refinitiv. Data as at 18 June 2020

Dividends are a key component of the wider NAV total return target of 9% pa, alongside the potential for capital growth (driven by inflation-linked rental growth and asset management opportunities) enhanced by moderate gearing. Since IPO in March 2017 to the end of FY19, the cumulative total return (adjusted for dividends paid but not assuming reinvestment of dividends) was 24.6% or an average annualised rate of 8.1%. Dividends accounted for around two-thirds of the total return. Acquisition costs incurred in growing the portfolio since IPO, subsequently written off, amount to c £7.1m or c 2.9p per share. Adjusting for this, the cumulative total return increases to 27.5% of an average annualised return of 9.0%, in line with the target.

Exhibit 17: NAV total return performance (no reinvestment of dividends paid)

2017*

2018

2019

Cumulative

Opening NAV per share (p)

98.0**

100.6

103.2

97.9

Closing NAV per share (p)

100.6

103.2

106.8

106.8

Dividends paid (p)

3.0

6.0

6.1

15.1

Annualised NAV total return

7.2%

8.5%

9.5%

24.6%

Compound annual average return

8.1%

Source: Impact Healthcare REIT data, Edison Investment Research. Note: *7 March 2017 to 31 December 2017. **Adjusted for IPO costs.

The Q120 NAV total return was 1.6% and our forecasts for the year (FY20) imply a total return of 7.7%%. For FY21 and FY22, our forecasts imply total returns of 9.0% and 9.2% respectively, in part supported by reduced acquisition costs. The key risks to these forecast returns are a negative near-term impact on earnings (not simply on the timing of rent receipts) from COVID-19 or a widening of market valuation yields.

In Exhibit 18 we show a summary of the performance and valuation of a group of REITs that we consider to be Impact’s closest peers within the broad and diverse commercial property sector. The group is invested in the primary healthcare, supported housing, and care home sectors, all targeting stable long-term income growth derived from long-lease exposures.

Exhibit 18: Peer group comparison

WAULT (years)

Price (p)

Market cap. (£m)

P/NAV (x)

Yield (%)

Share price performance

1 month

3 months

12 months

From 12M high

Assura

13.6

83

2216

1.56

3.3

11%

22%

31%

-5%

Civitas Social Housing

23.8

109

679

1.01

4.9

5%

36%

39%

-3%

Primary Health Properties

12.8

160

1951

1.48

3.6

2%

26%

20%

-5%

Target Healthcare

29.2

109

497

1.01

6.1

15%

36%

-7%

-13%

Triple Point Social Housing

25.7

97

341

0.92

5.3

0%

34%

16%

-10%

Average

21.0

1.20

4.6

6%

31%

20%

-7%

Impact Healthcare

19.8

100

318

0.93

6.2

1%

58%

-13%

-14%

UK property index

1,526

0.0

11%

26%

-9%

-23%

FTSE All-Share Index

3,448

0.0

4%

24%

-15%

-19%

Source: Historical company data, Refinitiv. Note: *Based on last published EPRA NAV per share. **Based on trailing 12-month DPS declared. Refinitiv price data at 18 June 2020.

In terms of share price performance, the peer group has outperformed the overall UK property sector and FTSE All-Share Index over the past year, driven by the primary care and social housing stocks. The share price performance of both the two care sector investors, Impact and Target, has trailed that of the group.

The primary healthcare investors (PHP and Assura) trade with lower than average yields and higher than average P/NAV, which we attribute to the exceptional strength of their tenant covenants with the vast majority of rents backed directly or indirectly by the government. However, compared with care homes, the average lease length is shorter, and although upwards-only, a significant share of the leases is subject to open market review rather than being indexed to inflation. For the social housing investors (Civitas, Triple Point), rental income is also funded by government via local authorities, although payment is made to the housing association tenants, who then pay the investor landlords, and linked to CPI. The stocks have recovered strongly during the past year from earlier concerns regarding the strength of the housing association tenant covenants, reducing the yield premium and narrowing/eliminating discounts to NAV.

In our opinion, if investors in the care home sector can continue to demonstrate a robust tenant performance during the pandemic, supporting company cash flows and dividends, the potential for a re-rating is strong.

Despite the substantial recovery from the short-lived sell-off at the start of the pandemic, Impact shares continue to offer an attractive yield well above the peer group average with a lower than average P/NAV. The company benefits from a long WAULT (19.8 years before 10-year tenant extension options) with no break clauses, and upwards-only, triple net rents, linked to RPI. This combination provides considerable visibility over a growing stream of contracted rental income and offers considerable protection against inflation. The robust tenant performance reported by Impact during the pandemic thus far, with no interruption in rent collections up to June, is a positive indicator for the tenant-led strategy and covenant strength, and the potential for a continuing re-rating of the shares.

Sensitivities

Long leases with RPI-linked rent increases provide considerable visibility of contractual income and underpin long-term dividend growth. We see the key sensitivities as relating to the following:

Regulatory changes or changes to government care policy have the potential to materially impact the sector, both positively and negatively, in ways that are difficult to predict. Changes to the long-term funding of care could have a positive impact on demand and stimulate much needed investment in the sector.

The failure of any of the tenants could negatively affect the collection of contractual income. Impact seeks to mitigate this risk through a rigorous investment process, ongoing oversight of all its homes and operators, and the increasing diversity of its tenant base. Currently the Minster Care Group remains a significant tenant representing c 51% of contracted rent roll (Minster c 33% and Croftwood c 18%), down from 100% at IPO. Meanwhile, the last reported Minster Care Group financial statement shows it continuing to trade profitably with no external debt.

Key operational and financial risks to the tenant operators include: their ability to maintain high standards of care and compliance with stringent and evolving regulatory oversight; upward pressure of staff costs and local shortages, especially for trained nursing staff; and budgetary pressures on the local authorities that fund c 50% of UK care home beds. The COVID-19 pandemic increases the risks and challenges facing operators in the near term, the impact and duration of which for now remains difficult to assess.

Average care home fees have risen at a faster rate than RPI in recent years, particularly fees for self-funded residents. In many cases these fees will be met by a draw-down of home equity and/or other savings. Any sustained reduction in asset values could weaken demand and have a negative impact on the growth of privately funded fees.

Strong investor interest in care home assets has seen valuations increase and the yields available on investment tighten, particularly for high-quality, modern, purpose-built assets, although favourable funding conditions have maintained a positive investment spread.

RPI-linked rent increases protect against inflation, provided inflation does not rise too much. Impact’s RPI-linked leases are subject to caps and collars, and we would expect the blended cap to be around 4% with a floor at c 2%. Should inflation increase significantly, above c 4%, the cap to rental increases could cause income growth to lag the growth in expenses and funding costs. We would nevertheless expect such conditions to generate more significant challenges to the mainstream commercial property market where occupancy is also likely to be more volatile.

Of Impact’s £125m of committed term loan and revolving credit facilities, all variable rate, £25m (most of drawn borrowings at 31 March 2020) is hedged against an increase in Libor above 1%. Further drawings of unhedged debt facilities will increase exposure to any future increase in borrowing costs, however assuming no change in the differential between Libor and RPI, the impact on the variable funding costs should be broadly matched by increases in rental income, provided RPI does not rise above the cap on rent increases.

The external investment manager operates with a relatively small but highly experienced team. If any of these were to leave, it would be important that they were suitably replaced.

Exhibit 19: Financial summary

Year to 31 December (£000s)

2017

2018

2019

2020e

2021e

2022e

INCOME STATEMENT

Cash rental income

9,453

13,866

19,113

25,312

30,490

32,107

Rental income arising from recognising rental premiums & fixed rent uplifts

(61)

3,443

4,867

5,059

4,858

4,666

Gross rental income

9,392

17,309

23,980

30,371

35,349

36,773

Net other income/(expense)

0

(3)

(2)

0

0

0

Net rental income

9,392

17,306

23,978

30,371

35,349

36,773

Administrative & other expenses

(2,318)

(4,270)

(4,589)

(5,266)

(5,429)

(5,668)

Operating profit before change in fair value of investment properties

7,074

13,036

19,389

25,104

29,920

31,105

Change in fair value of investment properties

2,378

4,134

9,070

3,602

4,817

5,247

Operating profit

9,452

17,170

28,459

28,706

34,737

36,351

Net finance cost

6

(698)

(2,127)

(2,507)

(3,435)

(3,611)

Profit before taxation

9,458

16,472

26,332

26,199

31,302

32,741

Tax

(1)

0

0

0

0

0

Profit for the year (IFRS)

9,457

16,472

26,332

26,199

31,302

32,741

Adjust for:

Change in fair value of investment properties

(2,378)

(4,134)

(9,070)

(3,602)

(4,817)

(5,247)

Change in fair value of interest rate derivatives

0

105

383

0

0

0

EPRA earnings

7,079

12,443

17,645

22,597

26,485

27,494

Rental income arising from recognising rental premiums & fixed rent uplifts

61

(3,443)

(4,867)

(5,059)

(4,858)

(4,666)

Non-recurring costs

0

742

171

0

0

0

Adjusted earnings

7,140

9,742

12,949

17,538

21,627

22,828

Average number of shares in issue (m)

162.6

192.2

254.0

319.0

319.0

319.0

Basic & diluted IFRS EPS (p)

5.82

8.57

10.37

8.21

9.81

10.27

Basic & diluted EPRA EPS (p)

4.35

6.47

6.95

7.08

8.30

8.62

Basic & diluted adjusted EPS (p)

4.39

5.07

5.10

5.50

6.78

7.16

Dividend per share (declared)

4.50

6.00

6.17

6.29

6.40

6.53

EPRA earnings dividend cover

97%

108%

113%

113%

130%

132%

Adjusted earnings dividend cover

98%

84%

83%

87%

106%

110%

BALANCE SHEET

Investment properties

156,226

220,463

310,542

401,799

449,616

457,863

Other non-current assets

1,651

5,725

10,111

15,170

20,028

24,694

Non-current assets

157,877

226,188

320,653

416,969

469,644

482,557

Cash and equivalents

38,387

1,470

47,790

17,161

15,916

15,479

Other current assets

119

587

554

554

554

554

Current assets

38,506

2,057

48,344

17,715

16,470

16,033

Borrowings

0

(24,709)

(23,461)

(82,915)

(123,369)

(123,823)

Other non-current liabilities

(1,712)

(1,866)

(1,768)

(1,768)

(1,768)

(1,768)

Non-current liabilities

(1,712)

(26,575)

(25,229)

(84,683)

(125,137)

(125,591)

Borrowings

0

0

0

0

0

0

Other current liabilities

(1,221)

(3,333)

(3,086)

(3,086)

(3,086)

(3,086)

Current Liabilities

(1,221)

(3,333)

(3,086)

(3,086)

(3,086)

(3,086)

Net assets

193,450

198,337

340,682

346,914

357,891

369,913

Adjust for derivative financial liability/(asset)

0

(477)

(94)

(94)

(94)

(94)

EPRA net assets

193,450

197,860

340,588

346,820

357,797

369,819

Period end shares (m)

192.2

192.2

319.0

319.0

319.0

319.0

IFRS NAV per ordinary share

100.6

103.2

106.8

108.8

112.2

116.0

EPRA NAV per share

100.6

102.9

106.8

108.7

112.2

115.9

CASH FLOW

Net cash flow from operating activities

8,236

9,991

14,941

20,046

25,062

26,439

Purchase of investment properties (including acquisition costs)

(153,338)

(55,076)

(73,416)

(84,655)

(40,000)

0

Capital improvements

(510)

(3,886)

(8,226)

(3,000)

(3,000)

(3,000)

Other cash flow from investing activities

6

39

110

26

16

16

Net cash flow from investing activities

(153,842)

(58,923)

(81,532)

(87,629)

(42,984)

(2,984)

Issue of ordinary share capital (net of expenses)

189,279

(53)

132,156

0

0

0

(Repayment)/drawdown of loans

0

26,000

(873)

59,000

40,000

0

Dividends paid

(5,286)

(11,611)

(16,143)

(19,967)

(20,325)

(20,719)

Other cash flow from financini activities

0

(2,321)

(2,229)

(2,079)

(2,997)

(3,172)

Net cash flow from financing activities

183,993

12,015

112,911

36,955

16,677

(23,891)

Net change in cash and equivalents

38,387

(36,917)

46,320

(30,629)

(1,245)

(437)

Opening cash and equivalents

0

38,387

1,470

47,790

17,161

15,916

Closing cash and equivalents

38,387

1,470

47,790

17,161

15,916

15,479

Balance sheet debt

0

(24,709)

(23,461)

(82,915)

(123,369)

(123,823)

Unamortised loan arrangement costs

0

(1,291)

(1,666)

(1,212)

(758)

(304)

Net cash/(debt)

38,387

(24,530)

22,663

(66,966)

(108,211)

(108,648)

Gross LTV (net debt as % gross assets)

0.0%

11.4%

6.8%

19.4%

25.5%

24.9%

Source: Impact Healthcare REIT historical data, Edison Investment Research estimates

Contact details

Revenue by geography

Impact Health Partners LLP*
Heddon House, 149-141 Regent Street
London W1B 4JD
UK
+44 (0)203 3146 7100
info@impactreit.uk
www.impactreit.uk
*External investment manager to Impact Healthcare REIT

Contact details

Impact Health Partners LLP*
Heddon House, 149-141 Regent Street
London W1B 4JD
UK
+44 (0)203 3146 7100
info@impactreit.uk
www.impactreit.uk
*External investment manager to Impact Healthcare REIT

Revenue by geography

Leadership team

Independent non-executive chairman, Impact Healthcare REIT: Rupert Barclay

Managing partner, Impact Health Partners: Mahesh Patel

Rupert Barclay, a chartered accountant with almost 30 years’ experience as a strategy consultant specialising in strategic decision support for companies and private equity firms, was appointed chairman of Impact REIT in January 2017. He is currently managing partner of Cairneagle Associates LLP and was previously corporate strategy director at Allied Domecq and Reuters, and partner at LEK Consulting. He has extensive board experience serving as chairman, chairman of the audit committee and as non-executive director of listed and quoted companies including Sanditon Investment Trust plc, (where he currently serves as chairman), Lowland Investment Company plc (where he was a director and chairman of the audit committee), Dimension Data plc (where he was the senior independent director) and Instinet, Inc. (where he was a director and member of the remuneration and audit committees).

Mahesh Patel is a qualified accountant who has over 30 years’ experience in healthcare-related industries and assets, including positions in finance. Prior to establishing Impact Health Partners (the investment manager) in 2016 he has previously built up and then sold three healthcare-related businesses: Highclear and Kingsclear (focused on residential care for the elderly) and a supported living business, Independent Living. In addition, he helped found and grow the elderly residential healthcare groups Minster and Croftwood, along with Pathways Care, which provides specialist support for people with various disabilities. In addition, he was a co-founder and director of Precision Dental, which invested in dental laboratories and invests in technology related to healthcare.

Managing partner, Impact Health Partners: Andrew Cowley

Finance director, Impact Health Partners: David Yaldron

Andrew Cowley is an experienced fund manager, who has been investing in infrastructure and private equity since 2000. Prior to establishing Impact Health Partners in 2016 he was a senior managing director at Macquarie and deputy chief executive of the listed Macquarie Airports. Before this, he was a managing director at Allianz, responsible for investments in alternative assets; a director of Kleinwort Benson and chairman of Dresdner Kleinwort Benson’s business in Russia; he began his career at SG Warburg. In addition, he has experience of serving on company boards, including various international airports, Moto Holdings, Creative Broadcast Services and as chairman of Halterm Container Terminal in Canada.

David Yaldron is a chartered accountant with more than 20 years’ experience, having held senior financial roles in real estate and investment companies. Prior to joining Impact Health Partners in June 2017 he was a director at Grosvenor, Britain & Ireland responsible for projects and new investments, becoming the senior director responsible for all investments, developments and strategic land activities outside London. Prior to Grosvenor, he worked for Europa Capital, managing its corporate investments and divestments across Europe and before this was head of investment monitoring at Coller Capital. David trained and spent the first 10 years of his career at KPMG, working in the Transaction Services team.

Principal shareholders (Source: 2019 Annual Report)

(%)

Quilter Investments

16.95

Premier Fund Managers

7.11

Valu-Trac Investment Management

6.68

Royal London Asset Management

6.58

Schroder & Co

6.06

Baillie Gifford

4.21

Integrated Financial Arrangements

4.20

Maal Limited

3.14

Companies named in this report

Assura (AGR), Civitas Social Housing (CSH), Impact Healthcare (IHR), LXI REIT (LXI), Primary Health Properties (PHP), Target (THRL)< Triple Point Social Housing (SOHO).


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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Impact Healthcare REIT and prepared and issued by Edison, in consideration of a fee payable by Impact Healthcare REIT. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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