Impact Healthcare REIT — Attractive financial and social returns

Impact Healthcare REIT (LSE: IHR)

Last close As at 27/03/2024

GBP0.83

−0.40 (−0.48%)

Market capitalisation

GBP347m

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Research: Real Estate

Impact Healthcare REIT — Attractive financial and social returns

Impact Healthcare REIT continues to deliver consistently positive returns, demonstrating the resilience of its tenant operators and the group’s strategy during the pandemic. Accretive portfolio growth combined with long-term inflation-linked rents are driving income and capital growth, while continuing full rent collection underpins increasing dividends.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Impact Healthcare REIT

Attractive financial and social returns

Company outlook

Real estate

13 July 2021

Price

118p

Market cap

£414m

Gross debt (£m) at 25 June 2021

62.3

Gross LTV (%) at 25 June 2021

13.7

Shares in issue

350.6m

Free float

94%

Code

IHR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.6

4.8

22.3

Rel (local)

5.5

1.3

1.5

52-week high/low

117.6p

94.8p

Business description

Impact Healthcare REIT, traded on the Main Market of the London Stock Exchange, invests in a diversified portfolio of UK healthcare assets, primarily 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

H121 results

Expected September 2021

Analyst

Martyn King

+44 (0)20 3077 5745

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

Impact Healthcare REIT continues to deliver consistently positive returns, demonstrating the resilience of its tenant operators and the group’s strategy during the pandemic. Accretive portfolio growth combined with long-term inflation-linked rents are driving income and capital growth, while continuing full rent collection underpins increasing dividends.

Year end

Net rental income (£m)

EPRA
earnings* (£m)

EPRA
EPS*(p)

EPRA NAV/
share (p)

DPS
(p)

P/NAV/
share (x)**

Yield
(%)**

12/19

24.0

17.6

6.9

106.8

6.17

1.11

5.2

12/20

30.8

23.1

7.3

109.6

6.29

1.08

5.3

12/21e

37.1

28.0

8.7

113.1

6.41

1.04

5.4

12/22e

43.1

33.3

9.5

117.6

6.57

1.00

5.6

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

Further accretive growth and increasing DPS

A 2.3% NAV total return in Q121 continued the consistent positive quarterly trend since IPO in 2017. Income and capital values continue to benefit from upwards-only, mostly inflation-linked rent increases and yield tightening; investors continue to be attracted by the visible, non-cyclical nature of care home property. A robust performance by tenant operators is evidenced by a broadly stable, c 1.8x, average rent cover and 100% collection of rents due as expected. Our forecasts are updated for the April 2021 equity raise and our expectations for the deployment of the proceeds; our EPRA EPS forecasts are increased by c 3% for FY21 and c 6% for FY22, increasing EPRA dividend cover (to c 1.4x). Our forecasts include a c £60m of accretive capital deployment (beyond the transactions already announced), taking LTV to c 25%, in line with the medium-term target. Given the strong pipeline of opportunities identified by the asset manager, a significant larger growth opportunity will remain, subject to additional capital resources.

Core income with asset management potential

Driven by demographics rather than the economy, a growing elderly population and a shortage of quality care homes suggests a strong demand in years to come. 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. Its portfolio comprises a majority of core, good-quality, upper middle-market homes alongside value-add assets where, working in partnership with tenants, there is potential 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: Robust, indexed, long-term income

FY21e DPS represents an attractive yield of 5.4%, with good prospects for fully covered dividend growth (both on an EPRA basis and adjusted ‘cash’ basis), supporting the c 7% premium to Q121 NAV per share, a discount to peers.

Investment summary: Attractive financial and social returns

Core income assets, enhanced by asset management

Impact’s resilient business model is focused on forming long-term relationships with selected tenants, investing in suitable properties that those tenants can efficiently and profitably operate, while providing a good quality of care. This, in turn, should generate a predictable and growing stream of good-quality cash flows to support dividend growth. Its portfolio comprises a majority core of good-quality, upper middle-market homes, but its willingness to acquire assets that may benefit from asset management initiatives, often as part of a less competitive portfolio transaction, differentiates it from peers. This approach provides acquisition opportunities that may otherwise not be available, benefits operators and their residents alike, enhances the sustainability of the portfolio, and offers enhanced risk-adjusted returns relative to a pure ‘buy-and-hold’ strategy.

Consistently positive returns

Impact aims to provide shareholders with attractive and sustainable returns, primarily in the form of quarterly dividends. DPS has increased each year since IPO, with a clear and progressive dividend policy, targeting growth in line with the inflation-linked rental uplifts received in the preceding financial year. Dividends paid have driven the consistently positive quarterly total returns since IPO in 2017, with aggregate net asset value (NAV) total return (adjusted for dividends paid, but not reinvested) from IPO to end-Q121 of 36.3%, a compound annual return of 7.9% (8.5% excluding acquisition costs incurred in building the portfolio); this is attractive in a low inflation/low return environment although slightly below the medium-term return target of 9% pa. Dividends have been well covered by EPRA earnings and substantially covered (FY20: 94%) on Impact’s more conservative adjusted (cash) earnings basis that excludes non-cash IFRS smoothing adjustments to rental income.

Funded for further accretive acquisitions

Impact has committed c £26m to accretive acquisitions in the year to date and has a strong pipeline of further opportunities. In April 2021 it raised £35m (gross) in an equity issue and has recently increased its debt facilities by a net £16m to £141m, at the same time extending the duration and lowering the average cost. With little more than £60m of the debt facilities drawn, the gross loan to value ratio (LTV) is a low c 14% and we forecast an additional c £60m of capital deployment by the end of Q122, taking LTV to c 25%, in line with the medium-term target. We assume a 7.25% yield on acquisitions (management targets a yield in line with the historical trend of c 7.5%), a significant premium over marginal borrowing costs of c 2%. Given the strong pipeline of opportunities identified by the investment manager, a significant larger growth opportunity will remain, subject to additional capital resources. Impact’s target FY21 DPS of 6.41p represents an attractive yield of 5.4%, which we expect to be well covered by EPRA earnings and fully covered on an adjusted (‘cash’) basis, supporting the c 7% premium to Q121 NAV, a discount to the peer group average.

Sensitivities

We see the key sensitivities (detailed on page 15) 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.

The COVID-19 pandemic, which continues to present challenges to care home operators.

The tenant base is increasingly diversified, but we note that the Minster Care Group (Minster and Croftwood), both part of the Minster Care Group, with a long track record of profitable operation, represents c 45% of the rent roll, down from 100% at IPO.

Company description: Long-term investor in a structurally supported, demographically driven sector

Company overview

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. The demand for care home places is ultimately driven by a growing population of elderly, with increasingly complex care needs, and is relatively insensitive to wider economic conditions; meanwhile there is an undersupply of quality care home beds.

Impact’s business model is focused on forming long-term relationships with selected tenants, investing in suitable properties that those tenants can efficiently and profitably operate while providing a good quality of care. This in turn should generate a predictable and growing stream of good-quality cash flows to support dividend growth. Additionally, the homes that Impact invests in are on long, fully insuring and repairing leases (weighted average unexpired lease term, or WAULT, of c 20 years, with no break clauses), subject to upwards only inflation-linked rent reviews (capped and collared). This provides a high level of visibility to future contractual income, while risk-adjusted returns for the sector (income and capital) have historically compared favourably with most other commercial property sectors.

Impact is externally managed by a sector specialist investment manager, Impact Health Partners (IHP). The principals of IHP 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. Also, they collectively own more than 3% of Impact shares, closely aligning their interests with those of the company and its shareholders.

ESG in focus

In common with many companies across the sector, Impact is giving an increasing focus to its environmental, social and governance (ESG) strategy. As a starting point, the social impact that its homes can generate is significant. An open and constructive engagement with tenants, supporting their operations and ability to provide good quality care for residents in an attractive environment, is core to the strategy and closely aligned with ESG principles. The independent board continually reviews and enhances its approach to corporate governance, keeping pace with the company’s growth and development, and increasingly integrating ESG and other long-term sustainability considerations into investment and asset management decisions. During 2020 the investment manager undertook a detailed review of each home to establish an action plan for the measures required to achieve a minimum EPC rating1 of B for each by 2030 (currently 36%).

  Energy performance certificate rating.

Increased scale, diversification, and efficiency since IPO

In 2017 Impact listed with an agreement in place to acquire an immediately income-generating seed portfolio of 56 homes for £149m, let to two tenants (Minster and Croftwood). It has since significantly grown and diversified its portfolio to reach a value of £427m at 31 March 2021 (Q121). Including investment commitments made since the end of Q121,2 the pro forma value is almost £450m, comprising 1113 assets let to 13 different tenants. Impact has not sought simply to add more tenants, but to add selected quality tenants with which to partner and grow over the long term; tenants that are most likely to provide good care, while running a sustainable and profitable business. This selective approach has nevertheless seen a steady decline in the share of income accounted for by Minster and Croftwood, now less half of the total (we estimate c 46%), a trend that we expect to continue. Over time we would expect Impact to target any single tenant exposure to be no more than 30%.

  An operational home in Lowestoft and a pre-let forward funded development in Norwich for a combined initial commitment of £20.8m.

  109 care homes let to 12 care home operators and two healthcare facilities let to the NHS.

Exhibit 1: Increasingly diversified portfolio

Exhibit 2: Split of income by tenant*

Source: Impact Healthcare REIT. Note: *In addition to care homes, includes two healthcare facilities let to NHS. **Q121 data adjusted for subsequent commitment to two assets let to new tenant.

Source: Impact Healthcare REIT data, Edison Investment Research. Note: *End-FY20 split of income as published adjusted for Mavern House acquisition let to Welford and recent acquisition commitments let to Carlton Hall.

Exhibit 1: Increasingly diversified portfolio

Source: Impact Healthcare REIT. Note: *In addition to care homes, includes two healthcare facilities let to NHS. **Q121 data adjusted for subsequent commitment to two assets let to new tenant.

Exhibit 2: Split of income by tenant*

Source: Impact Healthcare REIT data, Edison Investment Research. Note: *End-FY20 split of income as published adjusted for Mavern House acquisition let to Welford and recent acquisition commitments let to Carlton Hall.

Growth has been achieved while maintaining a moderate level of gearing and has delivered a steady decline in the EPRA cost ratio. End-FY20 gross LTV of 17.8% remained well below the medium-term target of 25% (maximum 35%) and was recently below 14% ahead of deployment of the April 2021 equity raise proceeds. The EPRA cost ratio reduced to 17.1% in FY20, and we expect this trend to continue. The FY20 total expense ratio (TER) was 1.53%.

Exhibit 3: Growth with moderate gearing

Exhibit 4: Scale economies as net assets increase

Source: Impact Healthcare REIT. Note: Gross loan to value (LTV) is defined as gross borrowings divided by the portfolio valuation, before for guaranteed rent uplifts and lease incentives.

Source: Impact Healthcare REIT historical data, Edison Investment Research forecast. Note: *Adjusted for non-recurring costs of £0.7m in FY18 and £0.2m in FY19.

Exhibit 3: Growth with moderate gearing

Source: Impact Healthcare REIT. Note: Gross loan to value (LTV) is defined as gross borrowings divided by the portfolio valuation, before for guaranteed rent uplifts and lease incentives.

Exhibit 4: Scale economies as net assets increase

Source: Impact Healthcare REIT historical data, Edison Investment Research forecast. Note: *Adjusted for non-recurring costs of £0.7m in FY18 and £0.2m in FY19.

Seeking further accretive growth

The company seeks opportunities to further grow the portfolio alongside both existing and new tenants, adding further asset and tenant diversification, and generating economies of scale. As it grows, Impact is also adding much needed new capacity to the market through forward funding the development of new pre-let homes,4 is expanding capacity and the range of services within the footprint of existing homes, and supporting the development of successful operators within the growing mid-market segment of the care home market.

  Existing projects include a 94-bed home in Hartlepool, expected to complete in Q321 at a total cost of £6.1m, and an 80-bed home in Norwich, expected to complete by the end of 2022 at a total cost of £10.5m.

Less competitive portfolio acquisitions, often off-market, have been an important contributor to this growth with acquisition yields consistently in the range of 7.5% (before costs) compared with the EPRA net initial yield of 6.7%. The resultant portfolio mainly comprises a majority core of good-quality, upper middle-market homes serving both the local authority and private markets, but also includes value-add assets where there is potential, working in partnership with and led by tenants, to upgrade/extend facilities and reposition homes in their local markets.

Exhibit 5: Yields on acquisition*

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

When launching its most recent equity raising in April, the company reported on a substantial identified pipeline of potential future investments,5 well maintained and managed by high-quality operators, capable of providing attractive levels of rent cover and a blended net initial yield in line with previous acquisitions. For operational homes, the vendors are typically owner occupiers either looking to exit (eg through retirement) or looking to grow as a new tenant for Impact through a sale and leaseback. We also expect Impact to look for additional forward-funding opportunities, which bring to the market modern, purpose-built and sustainable facilities, that can be efficiently operated by tenants, and supporting them to increase their offering in the private pay market. If undertaken in partnership with well performing, known, existing tenants these can be particularly attractive on a risk-return basis. Including the £35m (gross) of new equity that was raised and associated debt funding, our forecasts include an additional c £60m6 of capital deployment, with a significant additional opportunity remaining, subject to financing.

  At that time comprising a near-term pipeline of potential investments amounting to c £200m and a longer-term pipeline of more than £150m.

  In addition to the c £20.8m committed to acquisitions in Lowestoft and Norwich announced since the equity issue was launched.

Differentiated by asset management

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. Impact’s willingness to acquire assets that may benefit from such asset management initiatives, often as part of a portfolio transaction, differentiates it from peers and provides acquisition opportunities that may otherwise not be available. Asset management benefits operators and their residents alike, enhances the sustainability of the portfolio, and offers enhanced risk-adjusted returns, typically generating a yield on capital of at least 8% pa and, in many cases, increased capital values to reflect the asset enhancement. Projects are led by the tenants but are identified and agreed with Impact, in advance for newly acquired properties. Investment is directed at those that can create value for both parties, with tenants benefitting from the potential to enhance or extend facilities, broaden their appeal to residents, and increase earnings, and Impact benefitting from higher rents, improved rental cover, and in many cases capital value uplifts. As the group already owns the land and the tenants have existing central services on site, the marginal cost of adding beds is lower than the cost of greenfield development and the risks are easier to assess. Two of the most notable completed projects are at Diamond House, Leicester, and Freeland House, Oxfordshire. At both, new specialist dementia care facilities were developed within the footprint of the existing homes, offering specialist care and support to existing residents of the homes that may develop dementia symptoms and providing places for new residents with dementia needs. These additional specialist facilities added 30 new high-quality beds at Diamond House (which received Care Quality Commission (CQC)7 registration in February 2020) and 46 at Freeland House (which received CQC registration in April 2021). Two adjacent homes at Fairview Court and House will be linked and older accommodation reconfigured to upgrade facilities, add a net 10 beds and improve the EPC rating from C to A.

  Care Quality Commission, the care home regulator.

Impact aims to commit at least £15m to asset management on an annual basis, although new asset management activity (excluding forward-funding activity) in the past year has slowed. FY20 capex was c £1.7m. The slowdown is mainly due to the pandemic, but in some cases is due to the tenants of otherwise strongly performing homes preferring to defer significant projects. More recently, Impact has taken measures to formalise and incentivise the activation of the projects identified and agreed with tenants at acquisition. During FY20, £2.8m was committed to three acquisitions on this basis.

Robust performance during the pandemic

Performance during the pandemic has thus far provided good evidence of the resilience of the group’s strategy. Impact received 100% of its contracted rent for 2020 and continuing into 2021, achieved without changes to lease terms or payment schedules. This strong performance can primarily be attributed to:

At a sector level, the essential service that it provides and the symbiotic relationship between the care and health sectors was reflected in ongoing support for the sector from central and local government.

Specifically for Impact, a resilient operational and financial performance by its selected tenants was supported by an affordable level of rents and a good level of rent cover going into the pandemic.8 Discussed in more detail below, during the year to 31 December 2020 (FY20), average rent cover across all of Impact’s portfolio was just under 1.8x, compared with just over 1.8x in FY19, which we believe represents a good performance by industry standards.

  Rent cover is a key metric used by Impact in monitoring and assessing the ability of individual homes and operators to sustainably support the rents that it expects from its portfolio. The ratio tracks operational cash earnings at the home level (before rent) with the agreed rent on a quarterly basis.

Exhibit 6: Average tenant rent cover of Impact tenants through 2020

Exhibit 7: Average weekly fees charged by Impact’s tenants

Source: Impact Healthcare REIT

Source: Impact Healthcare REIT

Exhibit 6: Average tenant rent cover of Impact tenants through 2020

Source: Impact Healthcare REIT

Exhibit 7: Average weekly fees charged by Impact’s tenants

Source: Impact Healthcare REIT

Tenant rent cover dipped in the first half of the year as occupancy reduced by c 9% (from a little under 90% to a little more than 80%), mirroring the industry trend. Occupancy stabilised in H2 with rent cover benefiting from strong growth in weekly average fees and government support measures for industry providers. Completed acquisitions also enhanced the average (the initial rent cover on the Holmes Care acquisition, which completed in August, was more than 2.0x). Support for operators included support for personal protective equipment (PPE) expenses and other infection control measures. Local authorities generally agreed to prompt and supportive annual fee increments and, in some cases, have been willing to meet additional pandemic related costs through additional fee payments. Impact has worked with operators to isolate the impact of central and local government support on the fee data and estimates that the year-on-year increase in average weekly fees reduced from 14% to 7% on an underlying like-for-like basis.

As discussed in the next section, with no material change in the underlying demographic drivers of care home need/demand, the vaccination roll-out and the gradual easing of visiting restrictions, care home managers have recently been reporting a high level of tenant enquiries. Impact is cautiously optimistic about the speed with which the operators will be able to rebuild their occupancy but notes that the pandemic is not yet over and remains unpredictable as was demonstrated by a severe COVID-19 outbreak at one home in late February/early March despite what appear to be effective infection-control measures being in place and following initial vaccinations. There are no direct consequences for Impact with the home operated by a strong tenant with a good level of overall rent cover.

Strongly supportive market fundamentals

Demographically driven demand and dearth of quality supply

The demand for residential care is driven by demographic and health trends rather than being directly linked to economic conditions, with c £17.3bn spent annually on providing residential care for elderly people in the UK. Although the pandemic has negatively affected industry-wide care home occupancy (we estimate by c 10% on average) by reducing the short-term demand for care home places and slowing the pace 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.

Those aged 85 or over are the fastest growing part of the UK population and the predominant users of residential care. The Office for National Statistics forecasts that this group will more than double by mid-2043 to 3.2 million. The number of people living with dementia is expected to grow at an even faster pace. Research consultancy LaingBuisson has forecast that an additional 93,000 beds may be needed over the next 10 years, an increase of more than 20% on the current number.

The number of UK nursing and care home beds has fallen over the past 20 years, to less than 500,000 currently, primarily driven by the withdrawal of local authorities from care home operation and by obsolete homes leaving the market. Even since 2013, with the bulk of the local authority withdrawal complete, the number of new beds being built has only just matched the number withdrawing. The number of older homes has continued to decline as smaller, often converted and obsolete homes withdraw to be replaced by modern, larger homes.

Despite recent new building and the continued withdrawal of obsolete stock, there are still many older, often converted properties that may be unsuitable for upgrading and increasingly struggle to meet the standard needed to support the delivery of safe, effective and high-quality care increasingly demanded by residents and their families, care professionals and regulators such as the CQC.

Taking account of the net new rooms that will be required in coming years and the need to replace or upgrade a significant share of the existing stock, the sector investment requirement is very significant. We expect private capital providers such as Impact to continue to play a vital role in meeting this need and shaping the development of future provision, offering the potential for stable, long-term returns to investors while providing a positive social and community impact.

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 between 1998 and 2020, weekly fees charged by private sector operators have increased at an average c 3.8% pa for nursing care and 3.7% pa for residential care. Over the same period, the Retail Price Index (RPI) has averaged 2.8%. 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 (within the private sector) driven by customer choice and the shrinking pool of those eligible for public funding. In fact, despite being above inflation in recent years, fee growth has been struggling to keep pace with industry-wide cost pressures and industry profitability margins have trended lower. During the pandemic in 2020, fee growth accelerated, in part due to government support, while costs were relatively well contained, mitigating the impact of lower occupancy.

Exhibit 8: Comparison of state funded fees versus self-pay

£ per week

Index

Nursing

Residential

Nursing

Residential

Weighted average

937

672

100

100

State funded

779

596

83

89

Self-funded

1139

776

146

130

Source: Impact Healthcare REIT. Note: Impact average fees £827 per week in Q420. Around 43% are wholly self-funded and a further c 11% are partly self-funded (with top-ups); around 43% are local authority funded and c 11% NHS funded.

The profitability squeeze of recent years has been most acute for operators that rely heavily on state funded residents, particularly those funded by local authorities.9 Although local authorities have effectively withdrawn from the operation of residential care homes, they 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 financial pressures that they face 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. Although diversified, compared with the overall market the resident mix within the homes owned by Impact has a slightly above-average share of self-funded residents (c 43% wholly self-funded and a further c 11% partly self-funded with top-ups). Importantly, rents are set at sustainable levels; we estimate average weekly rents per bed of c £100 at end-FY20 compared with the average resident fees charged by its tenant operators of c £827 per week.

  Some residents with medical needs are funded by the NHS (c 9% of all residents).

Given the pressures on local authority funding and the demographically driven increasing need for care, there is a widespread recognition of the importance of finding a long-term solution to the funding of social care in the UK. This continues to be debated within government and publicly, along with closer co-operation between health and social care, but no proposals have yet been forthcoming. Reform is likely to stimulate the much-needed investment in the residential care estate and although less clear, it may also create more balance between the profitability of state-funded and self-pay residents. With this in mind, we believe a balance of resident funding sources to be desirable.

A fragmented market

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, 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 are 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 operate profitably and sustainably provide good-quality care is often overlooked.

Governance and management

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 and fees

The investment manager was established in 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. The IHP investment team has been expanding in step with the growth of Impact and includes eight professionals supporting its investment. Plans are in place for further growth, supported by investment in IT infrastructure that will enhance both the quality and efficiency in the day-to-day management of the assets. Biographies for the key members of the IHP investment team can be found at the back of this report. Mahesh Patel owns 10m shares in the company (c 3.4%), primarily through Maal Limited, and other members of the IHP team own c 0.3%, which closely aligns the interests of the investment manager with those of the company and its shareholders.

Investment management fees are set at 1.0% 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 (c £387m at 31 March 2021 adjusted for the net proceeds of the subsequent c £35m capital raise), economies of scale are already being achieved (Exhibit 4). The FY20 EPRA cost ratio continued to reduce (to 17.1%), a trend that we forecast to continue in FY21. The FY20 TER was 1.53% (FY19: 1.60%).

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 has 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 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 an 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; 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, and author of ‘The Valuation of Care Homes: Principles into Practice’ (2008); and since May 2021, Chris Santer, chief investment officer for Primary Health Properties, with 25 years of real estate investment and development experience. Other than Paul Craig, who represents the company’s largest shareholder, all of the non-executive directors are considered independent.

Portfolio overview

Exhibit 9 shows a summary of the portfolio. The independent portfolio value at 31 March 2021 (end-Q121) was £427.0m compared with £418.8m at 31 December 2020 (end-FY20).10 Impact has since committed to two further properties, both let to a new tenant for the group (the 12th care operator tenant and 13th tenant including the NHS), Carlton Hall. One of these properties is a high-quality care home near Lowestoft, let on a 30-year lease, and the other is a pre-let forward funding arrangement for a new care home in Norwich, pre-let for 35 years. The leases are subject to upward-only RPI-linked rent reviews (with a floor and cap at 2% pa and 4% pa). The initial consideration for the two properties is an aggregate £20.8m. Including these two commitments, the portfolio is now comprised of 111 healthcare properties, of which 109 are care homes (107 operational and two under development), let to 12 different tenants, and two were healthcare facilities leased to the NHS.

  The £8.2m increase vs 31 December comprised £5.4m related to investment and acquisitions and a £2.8m revaluation gain (0.7% on a like for like basis).

Exhibit 9: Portfolio summary

Current*

2020

2019

Properties

111

108

86

o/w care/nursing homes

109

106

84

Care home beds

6,141

5,924

4,274

Annualised contracted rent (£m)

33.4

30.9

23.1

Number of care home tenants

12

11

8

Total number of tenants including NHS

13

12

9

WAULT (years)

19.8

20.0

19.7

Portfolio valuation (£m)

418.8

318.8

EPRA topped-up net initial yield (NIY)

6.71%

6.66%

Source: Impact Healthcare REIT data. Note: *Includes Mavern House and commitments to acquire Carlton Hall, and Norwich forward funding.

All the care homes are let on long and fixed-term (20–35 years at inception with no break clauses) triple net leases (the tenant is responsible for all maintenance expenditure and insurance costs), with annual upwards-only, RPI-linked rent increases with floors and caps.11 Impact’s standard leases include covenants in respect of minimum rent cover, minimum maintenance expenditure and standards of care. The two NHS facilities are let on shorter leases (remaining terms of approximately two years and five years), indexed to the consumer price index. Over the medium term, working in partnership with the NHS, Impact believes there is asset management potential for both. Including the two recent commitments, the portfolio annualised contracted rent is now £33.4m. At end-Q121 the weighted average unexpired lease term was 19.8 years. The end-FY20 valuation reflected an EPRA topped-up net initial yield of 6.71%.

  Mostly with a 2% floor and 4% cap and a small number with a 1% floor and 5% cap.

Internal asset classifications

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. The portfolio is underpinned by a strong core portfolio, accounting for 67.9% by value at end-FY20. Core and value-add assets together represented c 98% of the portfolio by value; non-core assets are candidates for disposal and recycling into more attractive investment opportunities representing the balance. During FY20, one non-core asset was sold for £0.9m, a 24% premium to the carried value. Value-add properties represented 39.2% of the total number of properties but only 30.3% of the total value, highlighting the significant opportunity that exists to enhance their value, over time, through tenant-led asset management.

Exhibit 10: Portfolio classification measured by value of properties

Exhibit 11: Portfolio classification measured by number of properties

Source: Impact Healthcare REIT

Source: Impact Healthcare REIT

Exhibit 10: Portfolio classification measured by value of properties

Source: Impact Healthcare REIT

Exhibit 11: Portfolio classification measured by number of properties

Source: Impact Healthcare REIT

Financials

We have updated our forecasts to include the April 2021 equity raise and our expectations for the deployment of the proceeds, increasing our forecasts for net rental income and earnings. Allowing for the c 10% increase in shares outstanding, in per share terms we expect the capital deployment to be accretive and our forecast for EPRA earnings is increased by c 3% in FY21 and c 6% in FY22. EPRA dividend cover also increases (to c 1.4x) despite an increase in DPS (we now assume a slightly larger 2.5% increase in FY22).

Exhibit 12: Forecast revisions

Net rental income (£m)

EPRA earnings (£m)

EPRA EPS (p)

EPRA NAV/share (p)

DPS (p)

New

Old

Change (%)

New

Old

Change (%)

New

Old

Change (%)

New

Old

Change (%)

New

Old

Change (%)

12/21e

37.1

36.0

3.0

28.0

27.0

3.8

8.7

8.5

3.1

113.1

113.2

(0.0)

6.41

6.41

0.0

12/22e

43.1

37.7

14.4

33.3

28.4

17.1

9.5

8.9

6.5

117.6

117.2

0.4

6.57

6.54

0.5

Source: Edison Investment Research

Part of the increase in EPRA earnings reflects an increase in the non-cash IFRS rent smoothing adjustment (in respect of the straight-line recognition of fixed rent increases over the long contractual lease period), which we expect to increase along with the additional rent income generated by acquisitions. The company’s adjusted ‘cash’ earnings measure strips this out and the changes to our forecasts for adjusted EPS growth are little changed, although we continue to expect a strong advance in dividend cover on this basis (110% in FY21 and 118% in FY22). Increasing dividend cover demonstrates the strong cash flow emerging from the growing portfolio. Under the company’s dividend formula, the 2.5% DPS growth that we forecast in FY22 is looking back to rent indexation achieved in FY21. The increase in cover that we forecast indicates there may be room to increase DPS ahead of that suggested by this formula.

Exhibit 13: Adjusted earnings and dividend cover

£m unless stated otherwise

FY20

FY21e

FY22e

EPRA earnings

23.1

28.0

33.3

Rental income arising from recognising rental premiums & fixed rent uplifts

(4.9)

(6.3)

(6.8)

Amortisation of loan arrangement fees

0.7

0.8

0.8

Adjusted earnings

18.9

22.6

27.3

Dividend cover by EPRA earnings

115%

136%

144%

Dividend cover by adjusted earnings

94%

110%

118%

Source: Edison Investment Research

Expected capital deployment

When we last published, Impact had announced the January 2021 completion of the acquisition of Mavern House for £5.1m (before costs) and, based on the capital resources at the time, we assumed an additional £25m of capital deployment by mid-FY21.

Since then, in addition to the equity raise, Impact has announced the acquisitions of an operational care home, Carlton Hall, in Lowestoft, and the forward funding commitment in Norwich, representing a combined initial commitment of £20.8m (before costs). Reflecting the enlarged capital base, in addition to these announced transactions we assume an additional £60m of capital deployment by the end of Q122 (March 2022). We estimate that this represents an effectively full deployment of the recently increased debt facilities (see below) and is consistent with the medium-term target gross LTV of 25%.

We assume a 7.25% yield on consideration for the assumed capital commitment, which makes some allowance for the continuing strong investor interest in care home properties, although this may prove to be conservative; management hopes to achieve yields consistent with the c 7.5% historical trend (shown in Exhibit 5).

Our other income statement assumptions include:

Anticipated completion of the Hartlepool forward-funded development, adding contracted rental income of £475k pa from the beginning of H221, and the Norwich development, adding £750k of contracted rental income from the beginning of H222.

Annual asset management capex of £3.0m pa.

Annual RPI rental uplifts of 2.5% pa in FY21 and 3.0% in FY22.

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

Property valuations driven by inflation indexed rents

We expect revaluation movements will 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. FY21e is boosted by the level of acquisitions assumed for the year, partly offset by acquisition costs written off.

Exhibit 14: Income statement revaluation movement

£m

FY20

FY21e

FY22e

Gross revaluation movement

13.1

14.8

13.0

Acquisition costs capitalised

(2.7)

(2.7)

(1.0)

Net revaluation movement

10.5

12.0

12.0

IFRS rental smoothing adjustment

(4.9)

(6.3)

(6.8)

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

5.6

5.8

5.2

Acquisition costs as % purchase value

3.1%

4.2%

3.8%

Gross revaluation as % opening portfolio value

4.1%

3.5%

2.6%

Gross revaluation gain per share (p)

4.1

4.2

3.7

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

Funding growth

Impact has grown its portfolio since IPO using a blend of new equity and debt while keeping gearing at a moderate level and well within its medium-term targets. The gearing policy specifies a maximum 35% gross LTV at the time of drawdown, although the company does not expect average gearing to be higher than 25%. Most recently, new equity of c £35m was raised in April 2021, which together with existing debt facilities provides the capital for near-term growth. However, beyond this the scale of the investment opportunity significantly outstrips the current capital base.

Exhibit 15: Equity raising history

Date

Equity raised (gross)

Shares issued (m)

Issue price (p)

March 2017 (IPO)

£160.2m

160.2

100.00

November 2017

£32.6m

32.0

101.75

May 2019

£100.0m

94.3

106.00

December 2019

£35.0m

32.4

108.00

May 2021*

£35.3m

31.7

111.50

Total

£363.1m

350.6

Source: Impact Healthcare REIT. Note: The placing closed in April with settlement in early May 2021.

Following a recent refinancing,12 debt facilities amount to £141m, comprising a £15m term loan facility and £126m of more flexible, lower cost, revolving credit facilities (RCF). The refinancing introduced a new £26.0m RCF with NatWest Bank, with a three-year term and 1.90% margin over the sterling overnight index average (SONIA), while £10.0m of the Metro Bank term facility due in June 2023, and with a margin of 2.65% over base rate, was repaid without fees. This increased available debt, extended the average maturity and reduced the blended margin. At 25 June 2021, £62.3m of the debt facilities had been drawn, giving a gross LTV of 13.7% based on the 31 March 2021 gross asset value of £454.0m, and on a fully drawn basis would have been 26.5%. Net of outstanding commitments,13,14 the group had £63.2m in cash (£17.8m) and undrawn debt facilities available for further investment.

  Announced 28 June 2021 but effective 25 June 2021.

  Assuming all debt drawn but as a percentage of the 31 March 2021 gross assets.

  Acquisition, asset management and forward funding commitments of £28.3m and a £5.0m commitment on deferred payments based on future financial performance, all of which are expected to incrementally enhance returns.

We estimate the average maturity of the debt facilities at c 2.2 years with an average cost of c 2.3% (based on three-month Libor at 0.1%/SONIA at 0.05%). 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%.

Allowing for the increase in gross assets as a result of the acquisitions that we forecast, our estimated gross LTV at the end of FY22 is c 25%, in line with Impact’s medium-term target.

Exhibit 16: Debt portfolio

Lender

Facility type

Facility (£m)

Maturity

Margin

Interest cover covenant

Propco LTV covenant

Metro Bank

Term loan

£15.0

Jun-23

Base rate +2.65%

200%

35%

Metro Bank

RCF

£25.0

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%

NatWest Bank

RCF

£26.0

Jun-24**

SONIA +1.90%

Not yet disclosed

Not yet disclosed

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

All of the debt is secured against specific non-recourse security pools with no cross defaults and Impact continues to be in compliance with all of the loan covenants.

Valuation

As noted above, Impact has a progressive dividend policy and has increased annual aggregate DPS each year since IPO. The current year target of 6.41p (+1.9%) represents an attractive yield of 5.4%. The shares trade at a c 7% premium to Q121 NAV per share, above the c 2% average premium since IPO but below the high of c 11%.

Exhibit 17: Price to NAV ratio history since IPO

Source: Refinitiv. Note: Data at 13 July 2021.

Progressive dividends are a key component of Impact’s 9% pa medium-term total return target, also including the potential for capital growth (driven by inflation-linked rental growth and asset management opportunities). Aggregate NAV total return (adjusted for dividends paid, but not reinvested) from IPO to end-Q121 is 36.3% or a compound annual return of 7.9%. Adjusted for the acquisition costs incurred in building the portfolio, we estimate a compound annual return of 8.5%. Both measures are slightly below the company’s target but nevertheless represent an attractive return in a low inflation/low return environment.

Exhibit 18: NAV total return history*

2017

2018

2019

2020

Q121

Cumulative

Opening NAV per share (p)

97.9

100.6

103.2

106.8

109.6

97.9

Closing NAV per share (p)

100.6

103.2

106.8

109.6

110.5

110.5

Dividends paid (p)

3.0

6.0

6.1

6.3

1.6

23.0

NAV total return*

7.2%

8.5%

9.5%

8.5%

9.1%

36.3%

Average annualised return

7.9%

Source: Impact Healthcare REIT data, Edison Investment Research. Note: *Adjusted for dividends paid but does not assume reinvestment.

In Exhibit 19 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 19: Peer group comparison

WAULT (years)

Price (p)

Market cap (£m)

P/NTA* (x)

Yield** (%)

Share price performance

1 month

3 months

12 months

From 12M high

Assura

11

78

2084

1.39

3.6

4%

6%

1%

-7%

Civitas Social Housing

23

118

732

1.09

4.6

1%

6%

7%

-2%

Primary Health Properties

12

161

2279

1.43

3.7

3%

8%

6%

0%

Target Healthcare

29

119

545

1.09

5.6

4%

2%

11%

-2%

Triple Point Social Housing

26

105

422

0.98

4.9

0%

1%

2%

-8%

Average

20

1.20

4.5

2%

5%

6%

-4%

Impact Healthcare

20

118

375

1.06

5.4

6%

4%

19%

0%

UK property index

1,861

4%

10%

25%

0%

FTSE All-Share Index

4,070

0%

3%

19%

-1%

Source: historical company data, Refinitiv. Note: *Based on last published EPRA NTA/NAV per share. **Based on trailing 12-month DPS declared. Refinitiv price data at 13 July 2021.

In terms of share price performance, the peer group has trailed the overall UK property sector and FTSE All-Share Index over the past year as less defensive, more cyclical areas of the market have rebounded from last year’s lows. Over the same period, Impact has been the stronger performer in the group, although its yield remains above average and its P/NAV below average. There are several factors that suggest a continuing positive outlook for the shares including a combination of the long WAULT (19.8 years) with no break clauses and upwards-only, triple net rents, mostly linked to RPI, which provides considerable visibility over a growing stream of contracted rental income. It also offers considerable protection against inflation at a time when inflation expectations are increasing. The robust tenant performance reported by Impact during the pandemic thus far, with no interruption in rent collections, is a further positive indicator for covenant strength.

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 affect 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 45% of contracted rent roll, but has already reduced from 100% at IPO.

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 £141m of committed term loan and revolving credit facilities, all variable rate, £25m 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.

Exhibit 20: Financial summary

Year to 31 December (£m)

2017

2018

2019

2020

2021e

2022e

INCOME STATEMENT

Cash rental income

9.5

13.9

19.1

25.9

30.8

36.4

Rental income arising from recognising rental premiums & fixed rent uplifts

(0.1)

3.4

4.9

4.9

6.3

6.8

Net rental income

9.4

17.3

24.0

30.8

37.1

43.1

Administrative & other expenses

(2.3)

(4.3)

(4.6)

(5.3)

(5.7)

(6.0)

Operating profit before change in fair value of investment properties

7.1

13.0

19.4

25.6

31.3

37.1

Change in fair value of investment properties

2.4

4.1

9.1

5.6

5.8

5.2

Gain on disposal

0.0

0.0

0.0

0.2

0.0

0.0

Operating profit

9.5

17.2

28.5

31.3

37.1

42.3

Net finance cost

0.0

(0.7)

(2.1)

(2.5)

(3.3)

(3.8)

Profit before taxation

9.5

16.5

26.3

28.8

33.8

38.5

Tax

(0.0)

0.0

0.0

0.0

0.0

0.0

Profit for the year (IFRS)

9.5

16.5

26.3

28.8

33.8

38.5

Adjust for:

Change in fair value of investment properties

(2.4)

(4.1)

(9.1)

(5.6)

(5.8)

(5.2)

Gain on disposal

0.0

0.0

0.0

(0.2)

0.0

0.0

Change in fair value of interest rate derivatives

0.0

0.1

0.4

0.1

0.0

0.0

EPRA earnings

7.1

12.4

17.6

23.1

28.0

33.3

Rental income arising from recognising rental premiums & fixed rent uplifts

0.1

(3.4)

(4.9)

(4.9)

(6.3)

(6.8)

Amortisation of loan arrangement fees

0.0

0.2

0.4

0.7

0.8

0.8

Non-recurring costs

0.0

0.7

0.2

0.0

0.0

0.0

Adjusted earnings

7.1

9.9

13.4

18.9

22.6

27.3

Average number of shares in issue (m)

162.6

192.2

254.0

319.0

321.4

350.6

Basic & diluted IFRS EPS (p)

5.82

8.57

10.37

9.02

10.53

10.97

Basic & diluted EPRA EPS (p)

4.35

6.47

6.95

7.25

8.72

9.48

Basic & diluted adjusted EPS (p)

4.39

5.17

5.26

5.93

7.02

7.78

Dividend per share (declared)

4.50

6.00

6.17

6.29

6.41

6.57

EPRA earnings dividend cover

97%

108%

113%

115%

136%

144%

Adjusted earnings dividend cover

98%

86%

85%

94%

110%

118%

BALANCE SHEET

Investment properties

156.2

220.5

310.5

405.7

483.2

519.4

Other non-current assets

1.7

5.7

10.1

15.9

22.2

28.9

Non-current assets

157.9

226.2

320.7

421.6

505.4

548.3

Cash and equivalents

38.4

1.5

47.8

8.0

13.6

7.5

Other current assets

0.1

0.6

0.6

0.1

0.1

0.1

Current assets

38.5

2.1

48.3

8.1

13.7

7.6

Borrowings

0.0

(24.7)

(23.5)

(74.2)

(115.7)

(136.5)

Other non-current liabilities

(1.7)

(1.9)

(1.8)

(2.8)

(2.8)

(2.8)

Non-current liabilities

(1.7)

(26.6)

(25.2)

(77.0)

(118.5)

(139.3)

Borrowings

0.0

0.0

0.0

0.0

0.0

0.0

Other current liabilities

(1.2)

(3.3)

(3.1)

(3.1)

(3.8)

(4.4)

Current Liabilities

(1.2)

(3.3)

(3.1)

(3.1)

(3.8)

(4.4)

Net assets

193.5

198.3

340.7

349.5

396.7

412.3

Adjust for derivative financial liability/(asset)

0.0

(0.5)

(0.1)

(0.0)

(0.0)

(0.0)

EPRA net assets

193.5

197.9

340.6

349.5

396.7

412.2

Period end shares (m)

192.2

192.2

319.0

319.0

350.6

350.6

IFRS NAV per ordinary share

100.6

103.2

106.8

109.6

113.1

117.6

EPRA NAV per share

100.6

102.9

106.8

109.6

113.1

117.6

CASH FLOW

Net cash flow from operating activities

8.2

10.0

14.9

21.0

25.8

30.9

Purchase of investment properties (including acquisition costs)

(153.3)

(55.1)

(73.4)

(88.5)

(67.7)

(27.0)

Capital improvements

(0.5)

(3.9)

(8.2)

(1.7)

(4.0)

(4.0)

Other cash flow from investing activities

0.0

0.0

0.1

0.9

0.0

0.1

Net cash flow from investing activities

(153.8)

(58.9)

(81.5)

(89.3)

(71.7)

(30.9)

Issue of ordinary share capital (net of expenses)

189.3

(0.1)

132.2

0.0

34.5

0.0

(Repayment)/drawdown of loans

0.0

26.0

(0.9)

51.2

41.0

20.0

Dividends paid

(5.3)

(11.6)

(16.1)

(20.0)

(21.4)

(22.9)

Other cash flow from financing activities

0.0

(2.3)

(2.2)

(2.8)

(2.6)

(3.1)

Net cash flow from financing activities

184.0

12.0

112.9

28.5

51.5

(6.0)

Net change in cash and equivalents

38.4

(36.9)

46.3

(39.8)

5.6

(6.1)

Opening cash and equivalents

0.0

38.4

1.5

47.8

8.0

13.6

Closing cash and equivalents

38.4

1.5

47.8

8.0

13.6

7.5

Balance sheet debt

0.0

(24.7)

(23.5)

(74.2)

(115.7)

(136.5)

Unamortised loan arrangement costs

0.0

(1.3)

(1.7)

(2.2)

(1.6)

(0.8)

Net cash/(debt)

38.4

(24.5)

22.7

(68.4)

(103.8)

(129.8)

Gross LTV (net debt as % gross assets)

0.0%

11.4%

6.8%

17.8%

22.6%

24.7%

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

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 was appointed chairman of Impact REIT in January 2017. He has significant boardroom experience in listed and quoted companies, including Sanditon Investment Trust plc, (where he served 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. His career is in strategic consultancy, with roles as corporate strategy director at Allied Domecq and Reuters, following his time as a partner at LEK Consulting. He is currently managing partner of Cairneagle Associates LLP.

Mahesh Patel co-founded Impact Health Partners in 2016. He is a qualified accountant who has over 30 years’ experience in healthcare-related industries and assets, including positions in finance. Prior to 2006, he 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 was a co-founder and director of Precision Dental, which invested in dental laboratories, and invests in technology related to healthcare. Mahesh has helped found and grow Minster and Croftwood, which provide residential healthcare for the elderly, along with Pathways Care, which provides specialist support for people with various disabilities.

Managing partner, Impact Health Partners: Andrew Cowley

Finance director, Impact Health Partners: David Yaldron

Andrew Cowley co-founded Impact Health Partners in 2016. He is an experienced fund manager, who has been investing in infrastructure and private equity since 2000. 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. 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

(%)

Quilter Investors

17.0

Premier Fund Managers

8.0

Royal London Asset Management

6.6

Gravis Advisors

5.8

Schroder

5.6

Integrated Financial Arrangements

5.2

Baillie Gifford

3.7

Maal

3.1


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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

1185 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

1185 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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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 2021 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

1185 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

1185 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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