Impact Healthcare REIT — Performing well in a challenging environment

Impact Healthcare REIT (LSE: IHR)

Currency in GBP

Last close As at 02/02/2023

GBP1.08

2.40 (2.28%)

Market capitalisation

GBP437m

Impact Healthcare REIT — Performing well in a challenging environment

Impact Healthcare REIT’s performance year to date provides evidence of the continuing robustness of its strategy and the resilience of its tenants. For tenants, fee growth and increased occupancy are mitigating the impact of inflation such that rents continue to be paid in full while rent cover remains strong. For Impact, indexed rent uplifts are driving organic growth. Rising interest rates will negatively affect earnings and delay capital deployment, but we expect further fully covered DPS growth.

Martyn King

Written by

Martyn King

Director, Financials

Impact Healthcare REIT

Performing well in a challenging environment

Company update

Real estate

25 October 2022

Price

99p

Market cap

£399m

Gross debt (£m) at 30 September 2022

130.6

Gross LTV at 30 September 2022

21.4%

Shares in issue

404.8m

Free float

90%

Code

IHR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.5)

(16.2)

(16.6)

Rel (local)

(10.9)

(11.6)

(10.3)

52-week high/low

127p

92p

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

Payment of Q322 DPS

25 November 2022

Analyst

Martyn King

+44 (0)20 3077 5745

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

Impact Healthcare REIT’s performance year to date provides evidence of the continuing robustness of its strategy and the resilience of its tenants. For tenants, fee growth and increased occupancy are mitigating the impact of inflation such that rents continue to be paid in full while rent cover remains strong. For Impact, indexed rent uplifts are driving organic growth. Rising interest rates will negatively affect earnings and delay capital deployment, but we expect further fully covered DPS growth.

Year end

Net rental income (£m)

EPRA
earnings* (£m)

EPRA
EPS*(p)

EPRA NTA/ share (p)

DPS
(p)

P/NAV
(x)**

Yield
(%)**

12/20

30.8

23.1

7.3

109.6

6.29

0.90

6.4

12/21

36.4

27.4

8.1

112.4

6.41

0.88

6.5

12/22e

41.6

31.5

8.2

115.7

6.54

0.86

6.6

12/23e

49.2

32.9

8.1

115.5

6.76

0.86

6.8

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

Indexed rents and acquisitions driving growth

Indexed rent growth, 100% collected, acquisitions, and economies of scale have driven strong earnings growth year to date and Impact is well on track to meet its full year DPS target of 6.54p (+2%), fully covered by adjusted ‘cash’ earnings. For H122, DPS was covered 112% by adjusted earnings and 129% on an EPRA basis. With the portfolio valuation yield stable, rent growth continues to drive capital growth. EPRA NTA per share has increased 3.6% year to date to 116.5p, with a total return of 7.9%. Gearing is low and 77% of Q322 borrowing was fixed/hedged, but Impact is still exposed to further increases in the cost of capital. In volatile money markets we have based our forecasts on an increased SONIA benchmark rate to 6% (versus c 2.2% currently), assuming no further acquisitions despite available capital and opportunities. We expect continuing growth in fully covered DPS despite a reduction in forecast adjusted EPS (FY23e by 17%). Our broadly flat EPRA NTA forecast now allows for c 0.35% yield widening by end-FY23.

Predictable cash flow and progressive dividends

Impact operates in a structurally supported market, driven by the demographics of a growing elderly population rather than the economy. There is a shortage of homes with the quality to sustainably meet demand, non-discretionary over the medium term. Impact’s homes are let on long, triple net leases at affordable initial rents, indexed to inflation. As well as full rent collection, Impact expects strong rent cover to have increased in Q322 (1.73x in Q222). With predictable cash flow, DPS has increased each year since IPO in 2017, driving consistently positive accounting returns. Having raised c £62m of new equity in the year to date, Impact has a strong balance sheet with conservative gearing, and c £78m of available liquidity.

Valuation: Robust, indexed, long-term income

FY22e DPS represents an attractive yield of 6.6% and despite headwinds we continue to forecast fully covered dividend growth from inflation-indexed rent uplifts and a full contribution from recent investments. The c 15% discount to NAV already anticipates some weaking of property values as government bond yields increase.

Performing well in a challenging environment

In this note we provide an update on the factors that mitigate inflation risks for both Impact and its tenants, and our expectations for Impact to build further on its existing strong financial and operational performance. For an in-depth discussion of Impact Healthcare REIT’s strategy, please see our May Outlook. In that report we highlighted the strong fundamentals of the care home investment market, uncorrelated with the wider economy, and the predictability and sustainability of cash flows, supporting fully covered progressive dividend growth.

Indexed rents and acquisitions, supported by robust tenant performance, have driven strong y-t-d growth

The H122 results were reported on 16 August 2022, followed by the Q322 update on 21 October, discussed in detail later in this report. Despite the building headwinds of increased inflation and interest rates and economic and political uncertainty in the UK, tenant operators have seen their occupancy ratios continue to recover towards pre-pandemic levels, with strong growth in the underlying fees they charge for the care they provide; and they have been managing underlying cost pressures effectively.

In brief, H122 income grew strongly, driven by portfolio investment and inflation-indexed rent growth. Compared with H121, cash rental income increased c 16% year-on-year and including interest on property investment via loans, total income grew 28%. Compared with H221, the half-yearly growth rates were 7% and 15% respectively. With portfolio growth delivering economies of scale, adjusted ‘cash’ earnings increased by 28% versus H121, to £13.8m, and by 12% versus H221. H122 adjusted EPS of 3.66p (H121: 3.26p) covered DPS of 3.27p (+2% vs H121) by 112%. On an EPRA basis, DPS cover was 129%. Property revaluation gains, driven by rent uplifts and asset management initiatives, drove EPRA NTA per share growth of 3.3% in the period to 116.1p.

On an annualised basis, H122 contracted rents had increased from to £42.0m from £38.0m at end-FY21, and increased further, to £43.2m at end-Q322. In contrast to more mainstream UK commercial property sectors, the underlying valuation yield remained stable (EPRA topped-up net initial yield of 6.7%) with indexed rent growth translating into a 0.8% like-for-like valuation uplift. EPRA NTA per share increased 0.3% in the quarter to 116. 5p (IFRS NAV of 116.6p includes a positive interest rate derivative balance) and including DPS paid the EPRA NTA total return was 1.7%.

The end-Q322 portfolio was valued at £581m, including £38m of investments via loans. Including assets where acquisition contracts have been exchanged and assets under construction, this comprised 134 care homes and two healthcare facilities, let to 14 tenants. All rents are inflation-indexed (with caps and collars) with a weighted average unexpired lease term (WAULT) of 19.7 years. Just after the quarter end, as part of its active asset management programme, Impact sold a non-core for £2.7m, 4% ahead of the end-Q222 book value.

Inflation and rising interest rates are the new challenge

The COVID-19 pandemic presented many operational financial challenges to home operators and although it may not be over, the effects have become considerably more manageable. The key concerns for the sector are now the rapid acceleration in inflation and staff shortages. In this environment, Impact’s tenants have remained resilient, with increasing occupancy and strong fee growth mitigating inflationary cost pressures, supporting rent cover and the payment of rents in full.

Impact has built a strong track record of identifying attractively priced assets, mostly off-market, with an average gross yield on acquisitions of 7.4% since its initial public offering (IPO). At current interest rates, acquisitions remain accretive, but with money markets recently volatile and indicating a peak in the SONIA benchmark interest rate at between 5–6% (before declining) we expect a highly selective near-term approach to acquisitions (our forecasts include none).1 As a long-term investor, as interest rates begin to decline and, perhaps, with vendors also adjusting downwards their pricing expectations, we would expect acquisitions to resume from the significant pipeline of opportunities that have been identified. Meanwhile, rising market rates will have a negative effect on existing drawn variable rate debt, although we would expect Impact to seek opportunities to extend its interest rate protection or even refinance floating rate debt with fixed-rate, longer-term debt (but this is not assumed in our forecasts).

Based on the current debt structure, acquisitions would be primarily funded by variable rate debt facilities.

No change to DPS forecasts with strong cover maintained, despite increased funding costs

Exhibit 1 shows a summary of our revised forecasts. Despite the increase in interest rates and our reduced expectation for acquisitions, our DPS targets are unchanged and remain in line with Impact’s rent-growth linked dividend policy. Our forecasts for net revenue, comprising net rental income plus interest on investment via loans, are reduced for both years, primarily due to lower acquisition activity, partly offset by increased monetised capex, and modelling adjustments. The inflationary impact on administrative costs is limited by the significant weight of investment manager fees, linked to the level of net asset value. Higher borrowing costs are partly offset by lower average borrowings (the flip side of lower acquisition spend) but in FY23 the effect is particularly marked as the higher interest costs have a full impact and a £25m interest rate swap matures (see below).

Exhibit 1: Summary of forecasts

New forecast

Old forecast

Change

£m unless stated otherwise

FY22e

FY23e

FY22e

FY23e

FY22e

FY23e

FY22e

FY23e

Net revenue*

44.2

49.2

46.1

50.6

(1.8)

(1.3)

-4%

-3%

Administrative costs

(6.6)

(7.0)

(6.4)

(6.7)

(0.2)

(0.2)

4%

3%

Net finance costs

(6.1)

(9.4)

(6.1)

(6.8)

(0.0)

(2.6)

1%

38%

Tax

0.0

0.0

(0.5)

0.0

0.5

0.0

EPRA earnings

31.5

32.9

33.1

37.0

(1.7)

(4.1)

-5%

-11%

IFRS adjustments

(5.6)

(6.5)

(5.7)

(6.5)

0.0

0.1

-1%

-1%

Amortisation of loan arrangement fees

1.2

1.2

1.1

1.1

0.1

0.1

11%

11%

Adjusted earnings

27.0

27.6

28.5

31.5

(1.5)

(3.9)

-5%

-12%

EPRA EPS (p)

8.2

8.1

8.8

9.6

(0.6)

(1.5)

-7%

-15%

Adjusted EPS (p)

7.0

6.8

7.5

8.2

(0.5)

(1.4)

-7%

-17%

DPS declared (p)

6.5

6.8

6.5

6.8

0.0

0.0

0%

0%

EPRA DPS cover

125%

120%

134%

142%

Adjusted DPS cover

107%

101%

115%

121%

EPRA NTA per share (p) – ‘NAV per share’

115.7

115.5

117.9

124.1

(2.2)

(8.6)

-2%

-7%

NAV total return

8.7%

5.6%

10.6%

11.0%

Source: Edison Investment Research. Note: *Includes acquisition-related loan interest.

Tenants are resilient despite the challenges

In building and diversifying its tenant base Impact has sought to identify quality operators with which to partner and grow over the long term, targeting those that are most likely to provide good care, while running a sustainable and profitable business. A key element of this sustainability has been to set rents at an affordable level, typically representing 11–15% of home-level revenues. Allowing for development completions, we estimate average capital value per portfolio bed at c £80k and the average annual contracted rent per bed at c £5,800.

Occupancy has continued its steady recovery from its low in March 2021 (c 79%) and by end-Q322 had reached 87.3%2 (end-H122: 85.4%). A continuation of the average rate of improvement since March 2021 would see occupancy approach pre-pandemic levels (c 90%) by the end of 2022, but this is not a given.

  Excludes three turnaround homes that are yet to reach maturity.

Average rent cover3 was 1.85x over the 12 months to end-H122 and 1.73x at the end of the period, compared with c 1.90x before the pandemic (Exhibit 2). With the Q322 update, the investment manager had received operator trading data for 88% of the portfolio for July and August and based on these early indications anticipates that Q322 rent cover will have increased versus Q222. This would be in line with the seasonal pattern of rent cover evident from Exhibit 2, typically driven by operators agreeing and implementing most salary increases in December or January, while fee increases are mostly agreed during Q2, taking effect in Q3. In addition to seasonal factors, the reduction in rent cover from Q321 to Q222 reflects the following:

  Rent cover is a key metric Impact uses in monitoring and assessing the ability of individual homes and operators to sustainably support the rents 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.

A high starting point, with Q322 rent cover at above pre-pandemic levels.

During Q3 and Q4 of 2021 the operators were benefiting from improving occupancy, fee growth and continuing government financial support for pandemic infection control, in place until the end of Q122. Those government grants were scaled down from Q122 and during Q322 have effectively fully tailed off.

The acceleration of inflation through Q122 and Q222.

Occupancy and fee increases should continue to support operator profitability and rent cover in the second half of the year, but the impact of inflationary cost pressure remains uncertain.

Exhibit 2: Trend in average tenant rent cover*

Exhibit 3: Trend in average tenant EBITDARM4 margin

  EBITDARM is calculated as home-level earnings before interest, tax, depreciation and amortisation, rents and management overheads. The measure reflects the ability of homes to cover their rental costs with cash earnings.

Source: Impact Healthcare REIT. Note: *12-month rolling average.

Source: Impact Healthcare REIT

Exhibit 2: Trend in average tenant rent cover*

Source: Impact Healthcare REIT. Note: *12-month rolling average.

Exhibit 3: Trend in average tenant EBITDARM4 margin

  EBITDARM is calculated as home-level earnings before interest, tax, depreciation and amortisation, rents and management overheads. The measure reflects the ability of homes to cover their rental costs with cash earnings.

Source: Impact Healthcare REIT

Additional factors that mitigate the inflationary risks to operators include:

The demand for care home places is effectively non-discretionary, at least for anything other than short periods. The pandemic provided an extreme example of this, with admissions highly restricted for a period but occupancy now rebuilding.

UK care operators have a track record of being able to pass inflationary pressures through to fee increases. Between 1998 and 2021, weekly fees grew by an average of 3.8% per year for nursing care and 3.6% for residential care, a premium of c 1% per year over average annual growth in the Retail Price Index (RPI) of 2.8%.5

  Impact Healthcare REIT.

Average weekly fees charged by Impact’s tenants continue to increase in line with inflation and were up 10.7% in August 2022 compared with the average for Q321.

Most tenants are ungeared.

Utility and food costs, two areas of significant inflationary pressure, remain at manageable levels. Food costs were 3.7% of revenues in the eight-month period to 31 August, up from 3.6% of revenues in the year to December 2021. Utility costs were 2.5% of revenues, up from 2.0% of revenues in the year to December 2021. Based on the Q222 tenant profitability data, in the unlikely event that these costs were to double, with no ability for tenants to pass through any of the increase to resident fees, average EBITDARM margins would be negatively affected by a similar amount, but average rents would remain fully covered.6

  We note that the tenant EBITDARM margins, estimated by Impact, for Q1 and Q2 2022 (c 22%) also reflect the negative timing and seasonality factors discussed above.

Staffing is understandably the key cost across the sector and this has remained stable as a proportion of revenues (c 64% for Impact’s tenants), including a reduction in the use of more expensive temporary staff following a peak in Q122. Impact notes a widespread recognition that improvements to staff levels and conditions are generally to be welcomed and care home staff are not typically ‘overpaid’, which has historically made it easier to pass through staffing costs to fee increases.

While all rents paid to Impact are linked to inflation7 (c 99% to RPI and c 1% to the Consumer Price Index (CPI)), uplifts are typically capped at c 4% with a floor of c 2%.8 This means that while RPI inflation is above 4% Impact’s rental growth will lag in real terms, but it contributes towards rents remaining affordable for tenant operators and enhances the security of Impact’s income.

  As measured by the RPI and CPI.

  Q322 data show that in total, 84% of leases are RPI linked with an annual floor at 2% and cap at 4%; 15% are RPI-linked with an annual floor at 1% and cap at 5%; and 1% increase in line with CPI.

Interest rate protection on Impact’s borrowings

At end-Q322, borrowing costs on 77% of the £130.6m gross drawn debt were fixed or capped, comprising £75m of long-term, fixed-rate debt and a £25m nominal interest rate cap at 1% (ie, capping the SONIA benchmark rate at 1%). The cap matures in June 2023 at the same time as a £30m floating rate facility with Metro Bank (of which £15.3m was drawn at end-Q322). Impact has sufficient liquidity to repay this and is engaged in positive discussion over the arrangement of incremental facilities. While interest rate exposure on drawn debt is less than £30m, this would increase with further borrowings, based on the current debt structure. Total debt facilities (drawn and undrawn) of £206m are 48% fixed or capped. Meanwhile, gearing is prudent, with an end-Q322 gross loan to value ratio (LTV) of 21.4%, below the company’s c 25% medium-term target and well below the 35% maximum specified by the company’s gearing policy. Including exercise of the extension options9 the end-Q322 average debt maturity was 5.8 years.

  Additionally, Impact has an accordion option to extend the size of its revolving credit facility with NatWest by £24m to £50m with lender approval, and two one-year options to extend the maturity.

Capturing the effect of the September 2022 increase in the Bank of England base rate to 2.25%, the average running cost of drawn debt at end-Q322 was 3.9%. The cost of undrawn debt is at a margin of over SONIA, which closely tracks the base rate, which in September 2022 increased further to 2.25%. The market expectation, reflected in the forward curve, is for base rate/SONIA to increase much further, but has recently been volatile, anticipating a peak of between 5% and 6% by mid-2023 followed by a steady decline to a long-term 3%-4%. Our forecasts are based on 6.0% through FY23, which may prove to be conservative. On an annualised basis, a 0.5% shift in the benchmark rate is equivalent to a c 1.5% movement in adjusted earnings. We expect Impact to seek opportunities to extend its interest rate protection or even refinance floating-rate debt with fixed-rate, longer-term debt but this is not assumed in our forecasts.

Exhibit 4 provides a summary of Impact’s debt portfolio at end-Q322, including strong borrowing covenants. On a blended basis, the Q322 interest cover ratio (ICR) was more than 900% against the covenant requirement of 239%. On the same basis, the blended LTV of the banking facilities (excluding the private placement) was 19% versus a maximum limit of 48%. End-Q322 unsecured assets and cash amounted to £52.9m.

Exhibit 4: Summary of debt portfolio and covenants

Metro

Clydesdale

HSBC

NatWest

Total bank debt

Private placement

Facility type

RCF

RCF

RCF

RCF

Facility size

£30.0m

£25.0m

£50.0m

£26.0m

£131.0m

£75.0m

Amount drawn

£15.3m

£5.0m

£10.0m

£25.3m

£55.6m

£75.0m

Expiry

Jun-23

Mar-24

Apr-25

Jun-24

2035

Margin

265bps

225bps

200bps

190bps

Fixed 2.97%

Security pool

Propco 1&2

Propco 3

Propco 4

Propco 7

Propco 8

Propci ICR covenant

200%

325%

250%

250%

239%

250%

Blended ICR

903%

Propco LTV covenant

35%

55%

55%

50%

48%

55%

Blended LTV

19%

Source: Impact Healthcare REIT

We forecast a continuation of dividend growth, fully covered by earnings

Impact aims to provide shareholders with attractive and sustainable returns, primarily in the form of quarterly dividends, with the potential for capital growth. Supported by strong cash flow, covered DPS has increased each year since Impact’s IPO, with a clear and progressive dividend policy that targets 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 the company listed in 2017, with aggregate NAV total return (adjusted for dividends paid, but not reinvested) to end-Q322 of 52.5%, a compound annual return of 7.9%. We believe this is attractive in the low interest rate environment that has persisted since IPO and the headwind of the pandemic, even if slightly below the company’s medium-term return target of 9% per year.

Across the commercial property sector, income returns have historically shown less volatility than capital values, which have displayed material swings. Healthcare property returns have been less volatile than mainstream sectors. Despite the recent sharp increase in market interest rates and the cost of capital, we forecast continuing dividend growth, fully covered by adjusted earnings, in turn supported by index-linked rental growth. With government bond yields significantly higher than at the start of the year10 there is a widespread expectation that the widening of property valuation yields (decrease in values) that is already apparent across much of the UK commercial property sector will spread. When reporting the H122 results the investment manager said that it had observed some signs that valuation yields had begun to increase, from very low levels (less than 3%) at the very high end (super-super prime) of the market, but that it did not expect any material change in its chosen market segment where yields are already much higher. For Impact’s Q322 external property valuation, there was no change in the underlying valuation yield although our forecasts for FY22/FY23 allow for a c 0.35% widening, in aggregate, over the period. In this context, we expect NAV per share to be relatively flat through H222 and FY23, with an NAV total return in FY22 of 8.7% (H122: 6.2%) followed by 5.6% in FY23, all driven by dividends paid.

  The yield on the 10-year UK government gilt has increased from around 1% at the start of the year to around 4% recently, having reached a high of c 4.5% in late September.

The end-Q322 EPRA ‘topped-up’ net initial yield of the Impact portfolio was 6.7%. In addition to the yield widening reflected in our forecasts, we estimate that a 10-basis point increase/decrease in yield would decrease/increase FY23e NAV per share by c 2.4p.

Exhibit 5: EPRA NTA (‘NAV’) total return record*

2017**

2018

2019

2020

2021

Q322

FY17-Q322

Opening NAV per share (p)

97.9

100.6

103.2

106.8

109.6

112.4

97.9

Closing NAV per share (p)

100.6

103.2

106.8

109.6

112.4

116.6

116.6

Dividends paid (p)

3.0

6.0

6.1

6.3

6.4

4.9

32.6

Annualised NAV total return

7.2%

8.5%

9.5%

8.5%

8.4%

8.1%

52.5%

Of which dividends

3.1%

6.0%

5.9%

5.9%

5.8%

4.3%

33.3%

Of which capital growth

2.8%

2.5%

3.5%

2.6%

2.6%

3.7%

19.1%

Average total return per annum

7.9%

Source: Impact Healthcare REIT data, Edison Investment Research. Note: *EPRA NTA adjusted for dividends paid but not assuming reinvestment. ** From March 2017, adjusted for IPO issuance costs.

We expect acquisitions to pause near term, but Impact continues to seek opportunities for growth with tenants

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. With its equity raise in June 2022,11 the company provided details of a strong pipeline of potential acquisition opportunities12 and we understand that this continues to be the case. Impact also has available liquidity for acquisitions, which we estimate at c £78m, comprising cash and available undrawn debt less outstanding commitments.13

  This was announced in June 2022 and closed in early July, raising £22.3m (gross) at 117p per share, a 1.8% premium to the NAV at the time.

  Amounting to c £169m at the time.

  Adjusting for the proceeds of the equity issue, Impact stated end-H122 available liquidity at a pro forma £90m and has since exchanged contracts to acquire two additional homes for £14.0m (before costs) and the sale of one non-core home for £2.65m.

However, given the significant recent increase in the cost of capital, we anticipate that Impact will take a highly selective approach to acquisitions, even where these offer attractive operational and strategic opportunities. In most cases we believe care home operators that may be seeking to exit the sector are yet to adjust their pricing expectations to the increased cost of capital that must be borne by investors, and we assume no additional acquisitions in our forecast period to end-FY24.

Where attractive terms can be agreed, perhaps because of vendor willingness to accept lower prices, a decline in interest rates or the potential for innovative financing solutions, acquisitions may still be possible.

Recent financial and operational performance in detail

Exhibit 5 provides a summary of the H122 financial performance arranged to show a breakdown of adjusted ‘cash’ earnings and a reconciliation to EPRA and statutory IFRS earnings.

Exhibit 6: Summary of H122 financial performance

£m unless stated otherwise

H122

H121

H122/H121

Cash rental income

16.9

14.6

16%

Interest on loan investments *

1.8

0.0

Total adjusted income

18.8

14.6

28%

Administrative and other expenses

(3.2)

(2.8)

16%

Net finance expense

(1.8)

(1.2)

54%

Adjusted earnings

13.8

10.7

28%

EPRA adjustments

IFRS rent smoothing & lease incentive adjustments

2.7

3.2

Amortisation of debt arrangement fees and lease incentives

(0.6)

(0.4)

EPRA earnings

15.9

13.5

18%

Change in fair value of investment properties

10.6

1.0

Change in fair value of call option

0.5

0.0

Change in fair value of interest rate derivative

0.2

0.0

IFRS earnings

27.3

14.5

88%

Other data:

IFRS EPS (p)

7.26

4.41

65%

EPRA EPS (p)

4.22

4.10

3%

Adjusted EPS (p)

3.66

3.26

12%

DPS declared (p)

3.27

3.21

2%

DPS cover (EPRA earnings)

129%

128%

DPS cover (adjusted earnings)

112%

102%

Investment properties at valuation*

568.9

432.4

Gross debt

137.6

62.4

Gross LTV

23.1%

13.7%

EPRA net assets (‘NAV’)

448.1

388.0

EPRA NTA per share (p) – ‘NAV per share’

116.09

110.7

5%

EPRA NTA total return (‘NAV total return’)

6.2%

3.9%

Source: Impact Healthcare REIT data, Edison Investment Research. Note: *Reflects properties invested in via loans to the operators with options for Impact to acquire.

Looking first at adjusted earnings, the key highlights of the H122 financial performance were:

Cash rental income increased c 16% versus H121, primarily the result of completed acquisitions and inflation-indexed rent growth.

Interest on the £37.5m investment via a loan to existing tenant Holmes Care Group14 for the purchase of a 12-home property portfolio amounted to c £1.8m.

  The loan enabled Holmes Care to take immediate operational control of the homes pending the completion of a potentially lengthy regulatory approval process, and for Impact to earn immediate income on the investment. Once this process completes, we expect Impact to exercise its purchase option to acquire the homes at a 7.2% gross yield. Meanwhile, the loan earns interest at a similar level (net of tax). Impact has the option to purchase the assets once all necessary regulatory approvals required by the operators have completed. Assuming option exercise, the loan interest converts to equivalent rental income.

Total income increased c 28% and administrative expenses by a much lower c 16%. Expense growth primarily reflected increased asset management fees (up c 19%), driven by higher average net assets, with other expenses up c 7%. Including loan interest received, the adjusted EPRA cost ratio reduced to 14.8% compared with 15.8% in FY21.

Higher finance costs, before loan arrangement fee amortisation and interest rate derivative gains, were driven by higher average debt, reflecting borrowings drawn to fund portfolio investment.

Adjusted earnings increased c 28% to £13.8m and adjusted EPS by c 12% to 3.66p.

EPRA earnings including non-cash IFRS rent smoothing adjustments as well as loan arrangement fee amortisation increased c 18% to £15.9m and EPRA EPS by c 3% to 4.22p.

DPS of 3.27p (+2% vs H121) was covered 129% by EPRA earnings and 112% by adjusted earnings.

Including fair value movements, IFRS earnings increased 88% to £27.3m.

The property revaluation movements of £10.6m included market value property uplifts of £13.4m before accounting adjustments to offset the non-cash rental income reported in IFRS earnings. Market value uplifts were driven by inflation indexed rent increases and a £1.9m gain (c 30% on the £6.1m cost) triggered by practical completion of Impact’s first forward-funded development in Hartlepool. The EPRA ‘topped-up’ net initial yield of 6.69% was little changed from 6.71% at end-FY21.

A £0.5m fair value gain was generated on the option to acquire the properties underlying the loan investment to Holmes Care.

IFRS net asset value per share increased to 116.18p and, adjusted for the fair value of interest rate derivatives, EPRA net tangible assets (NTA) to 116.09p, a 3.3% increase from end-FY21.

Exhibit 7 shows a summary of the Q323 financial performance, provided by Impact. With IFRS smoothing adjustments netted off against revaluation costs. The ‘remaining contribution to reserves’ excluded non-recurring issuance costs related to the July 2022 equity issuance and was above the quarterly DPS paid. Adjusted ‘cash’ earnings adds back amortisation of loan arrangement fees and other non-cash adjustments, and allowing for this, as well as the increased number of shares, we estimate that DPS was well covered, consistent with our FY22 forecasts. Meanwhile, adjusting IFRS NAV per share of 116.62p for the positive mark to market impact of interest rate derivatives, EPRA NTA per share was 116.46p.

Exhibit 7: Reconciliation of Q3 NAV movement

Pence per share

IFRS NAV per share at end-H122

116.18

Revaluation gains on investment properties

0.57

Non-recurring costs

(0.18)

Quarterly dividend paid

(1.64)

Net remaining contribution to reserves

1.69

Unaudited IFRS NAV per share at end-Q322

116.62

IFRS NAV per share at end-H122

Revaluation gains on investment properties

Non-recurring costs

Quarterly dividend paid

Net remaining contribution to reserves

Unaudited IFRS NAV per share at end-Q322

Pence per share

116.18

0.57

(0.18)

(1.64)

1.69

116.62

Source: Impact Healthcare REIT

Year-to-date acquisitions and further diversification

During H122, Impact completed the acquisition of seven homes and exchanged contracts to acquire a further three, for a total consideration of £55.2m. In each case these transactions were in line with Impact’s strategy to grow partnership with selected tenants. The end-H122 portfolio was diversified across 13 tenants, operating 134 homes (including properties under exchange), providing more than 7,000 beds. On 22 August, Impact announced it had exchanged contracts to acquire two additional homes for £14.0m (before costs), at an accretive gross yield of 6.4% and operated by a new (14th) tenant to the group, Belmont Healthcare. One of the homes is purpose built and offers asset management opportunities, including realising the potential of its large site. The other has been recently refurbished. Both are rated EPC B.15

Energy Performance Certificate

Asset management creating value for Impact and tenants

While we forecast a pause in acquisition activity, we expect asset management projects to continue. Asset management is led by tenants and directed at those 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, while Impact benefits from higher rents, improved rental cover and, in many cases, capital value uplifts. 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, typically generating a low-risk yield on capital of at least 8% pa and supporting capital values. With the H122 results, the company reported that four projects had been completed since the beginning of 2022, with a further 15 projects started or in planning.

In addition to asset management of existing assets, Impact also forward-funds the development of pre-let, modern purpose-built facilities, bringing new capacity to market in attractive locations with good structural demand-supply balances. During H122 it achieved practical completion at a 94-bed development in Hartlepool at a cost of £6.1m and an expected annual yield of 7.8%. A £1.9m (30%) valuation uplift was recorded. Detailed planning continues for the construction of an 80-bed home in Norwich that will provide a range of residential, nursing and dementia care, at a total cost of £10.5m. Impact expects to start construction before the end of the year.

Valuation: Attractive yield with progressive, fully covered DPS

Impact’s FY22 target DPS of 6.54p (+2.0%), fully covered, represents an attractive yield of 6.6%. Meanwhile the shares trade at a 15% discount to the end-Q322 EPRA NTA (NAV) per share of 116.46p and appear to already anticipate a weakening of property valuations. The valuation is now similar to that reached at the peak of pandemic uncertainty in 2020, which proved to be an attractive entry point, with the robustness of tenants subsequently confirmed.

Exhibit 8: Price to NAV and dividend yield history since listing

Source: Refinitiv prices as at 15 October 2022. Note: Company published NAV and DPS data.

Exhibit 7 shows a summary of the performance and valuation of a group of real estate investment trusts (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 9: Peer group comparison

WAULT*** (years)

Price (p)

Market cap (£m)

P/NTA* (x)

Yield** (%)

Share price performance

1 month

3 months

1 year

3 years

Assura

12

51

1494

0.83

5.9

-12%

-26%

-30%

-32%

Civitas Social Housing

22

58

352

0.52

9.6

-17%

-29%

-37%

-32%

Home REIT

24

82

647

0.74

6.7

-14%

-31%

-27%

N/A

Primary Health Properties

11

107

1425

0.91

6.0

-12%

-26%

-30%

-23%

Target Healthcare

27

80

496

0.71

8.5

-18%

-30%

-32%

-30%

Triple Point Social Housing

26

66

264

0.59

8.0

-15%

-31%

-34%

-26%

Average

20

0.72

7.5

-14%

-29%

-32%

-28%

Impact Healthcare

20

99

399

0.85

6.6

-11%

-16%

-16%

-10%

UK property index

1,246

-5%

-27%

-33%

-32%

FTSE All-Share Index

3,821

-1%

-5%

-7%

-5%

Source: Historical company data, Refinitiv. Note: *Based on last published EPRA NTA/NAV per share. **Based on trailing 12-month DPS declared. ***Weighted average unexpired lease term. Refinitiv price data at 25 October 2022.

Impact’s shares have outperformed the peer group and the broad UK property market over the past one and three years. Its trailing yield is now below the peer group and its P/NAV is above the average, albeit of a wide range, and has converged on the rating of the primary healthcare investors, Assura and PHP, long recognised for the security and predictability of income. In our view, Impact’s valuation will have benefited from a robust performance during the pandemic, providing investor confidence in the sustainability of its growing stream of contracted rental income, a combination of the long weighted average unexpired lease terms and upwards-only, triple net leases, and rents mostly linked to RPI.

Exhibit 10: Financial summary

Year to 31 December (£m)

2018

2019

2020

2021

2022e

2023e

INCOME STATEMENT

Cash rental income

13.9

19.1

25.9

30.5

36.0

42.8

Rental income arising from recognising rental premiums, fixed rent uplifts & lease incentives

3.4

4.9

4.9

5.9

5.6

6.5

Net rental income

17.3

24.0

30.8

36.4

41.6

49.2

Administrative & other expenses

(4.3)

(4.6)

(5.3)

(5.8)

(6.6)

(7.0)

Realised gain on disposal

0.0

0.0

0.2

0.3

0.0

0.0

Operating profit before change in fair value of investment properties

13.0

19.4

25.7

30.9

34.9

42.3

Unrealised change in fair value of investment properties

4.1

9.1

5.6

4.2

7.1

(6.5)

Operating profit

17.2

28.5

31.3

35.2

42.0

35.8

Loan related interest

0.0

0.0

0.0

0.1

2.6

0.0

Other net finance cost

(0.7)

(2.1)

(2.5)

(3.3)

(5.9)

(9.4)

Profit before taxation

16.5

26.3

28.8

32.0

38.8

26.4

Tax

0.0

0.0

0.0

0.0

0.0

0.0

Profit for the year (IFRS)

16.5

26.3

28.8

32.0

38.8

26.4

Adjust for:

Change in fair value of investment properties

(4.1)

(9.1)

(5.6)

(4.2)

(7.1)

6.5

Gain on disposal

0.0

0.0

(0.2)

(0.3)

0.0

0.0

Change in fair value of interest rate derivatives

0.1

0.4

0.1

(0.1)

(0.2)

0.0

EPRA earnings

12.4

17.6

23.1

27.4

31.5

32.9

Rental income arising from recognising rental premiums & fixed rent uplifts

(3.4)

(4.9)

(4.9)

(6.0)

(5.6)

(6.5)

Amortisation of loan arrangement fees

0.2

0.4

0.7

1.0

1.2

1.2

Amortisation of lease incentive

0.1

0.0

0.0

Non-recurring costs

0.7

0.2

0.0

0.0

0.0

0.0

Gain on disposal

0.0

0.0

0.2

0.3

0.0

0.0

Adjusted earnings

9.9

13.4

19.1

22.7

27.0

27.6

Average number of shares in issue (m)

192.2

254.0

319.0

339.8

385.5

404.8

Basic & diluted IFRS EPS (p)

8.57

10.37

9.02

9.41

10.06

6.53

EPRA EPS (p)

6.47

6.95

7.25

8.05

8.16

8.12

Adjusted EPS (p)

5.17

5.26

5.98

6.68

7.01

6.82

Dividend per share (declared) (p)

6.00

6.17

6.29

6.41

6.54

6.76

EPRA earnings dividend cover

108%

113%

115%

126%

125%

120%

Adjusted earnings dividend cover

86%

85%

95%

104%

107%

101%

NAV total return

8.5%

9.5%

8.5%

8.4%

8.7%

5.6%

BALANCE SHEET

Investment properties

220.5

310.5

405.7

437.6

581.3

586.9

Other non-current assets

5.7

10.1

15.9

62.0

30.3

36.7

Non-current assets

226.2

320.7

421.6

499.7

611.6

623.6

Cash and equivalents

1.5

47.8

8.0

13.3

13.1

2.4

Other current assets

0.6

0.6

0.1

1.6

1.8

1.8

Current assets

2.1

48.3

8.1

14.8

14.9

4.3

Borrowings

(24.7)

(23.5)

(74.2)

(110.9)

(148.8)

(150.0)

Other non-current liabilities

(1.9)

(1.8)

(2.8)

(2.6)

(2.6)

(2.6)

Non-current liabilities

(26.6)

(25.2)

(77.0)

(113.5)

(151.4)

(152.6)

Borrowings

0.0

0.0

0.0

0.0

0.0

0.0

Other current liabilities

(3.3)

(3.1)

(3.1)

(6.7)

(6.6)

(7.5)

Current Liabilities

(3.3)

(3.1)

(3.1)

(6.7)

(6.6)

(7.5)

Net assets

198.3

340.7

349.5

394.2

468.5

467.8

Adjust for derivative financial liability/(asset)

(0.5)

(0.1)

(0.0)

(0.1)

(0.3)

(0.3)

EPRA NTA

197.9

340.6

349.5

394.2

468.2

467.5

Period end shares (m)

192.2

319.0

319.0

350.6

404.8

404.8

IFRS NAV per ordinary share

103.2

106.8

109.6

112.4

115.8

115.6

EPRA NTA per share

102.9

106.8

109.6

112.4

115.7

115.5

CASH FLOW

Net cash flow from operating activities

10.0

14.9

21.0

23.6

24.8

36.7

Purchase of investment properties (including acquisition costs)

(55.1)

(73.4)

(88.5)

(28.1)

(125.0)

(8.0)

Capital improvements

(3.9)

(8.2)

(1.7)

(1.1)

(6.7)

(4.0)

Other cash flow from investing activities

0.0

0.1

0.9

(35.9)

39.6

0.0

Net cash flow from investing activities

(58.9)

(81.5)

(89.3)

(65.1)

(92.1)

(12.0)

Issue of ordinary share capital (net of expenses)

(0.1)

132.2

0.0

34.6

60.9

0.0

(Repayment)/drawdown of loans

26.0

(0.9)

51.2

38.2

37.1

0.0

Dividends paid

(11.6)

(16.1)

(20.0)

(21.9)

(25.4)

(27.1)

Other cash flow from financing activities

(2.3)

(2.2)

(2.8)

(4.1)

(5.4)

(8.2)

Net cash flow from financing activities

12.0

112.9

28.5

46.8

67.1

(35.4)

Net change in cash and equivalents

(36.9)

46.3

(39.8)

5.3

(0.2)

(10.6)

Opening cash and equivalents

38.4

1.5

47.8

8.0

13.3

13.1

Closing cash and equivalents

1.5

47.8

8.0

13.3

13.1

2.4

Balance sheet debt

(24.7)

(23.5)

(74.2)

(110.9)

(148.8)

(150.0)

Unamortised loan arrangement costs

(1.3)

(1.7)

(2.2)

(3.6)

(2.8)

(1.6)

Net cash/(debt)

(24.5)

22.7

(68.4)

(101.3)

(138.5)

(149.2)

Gross LTV (net debt as % gross assets)

11.4%

6.8%

17.8%

22.3%

24.2%

24.1%

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

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 £60,000 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 2022 Edison Investment Research Limited (Edison).

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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

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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.

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London +44 (0)20 3077 5700

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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

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Level 4, Office 1205

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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 £60,000 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 2022 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

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London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

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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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Basilea Pharmaceutica — New supportive data from ERADICATE

Basilea Pharmaceutica has presented detailed data from the Phase III ERADICATE study of Zevtera (ceftobiprole) in the treatment of Staphylococcus aureus bacteraemia (SAB). In this, Zevtera demonstrated an overall success rate of 77.9% (77.8% for daptomycin), a microbiological eradication rate of 82.0% (77.3% for daptomycin), an all-cause mortality rate of 9.0% (9.1% for daptomycin) and a new SAB complications rate of 5.8% (5.6% for daptomycin) at 70 days post-randomisation in the modified intent-to-treat population. Additionally, the median time to bloodstream clearance for methicillin susceptible Staphylococcus aureus (MSSA) was three days with Zevtera (four days with daptomycin), and five days for MRSA for Zevtera and daptomycin. These secondary outcomes add to the previous reporting that ERADICATE met the primary endpoint of non-inferiority versus the comparator arm. We see these new data as supportive of Zevtera’s utility in treating serious bacterial infections and as an important result for the company. Our valuation of Basilea Pharmaceutica is unchanged at CHF903.5m or CHF76.3/share.

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