Impact Healthcare REIT — Strong H1 progress and positive reforms

Impact Healthcare REIT (LSE: IHR)

Currency in GBP

Last close As at 04/02/2023

GBP1.08

2.40 (2.28%)

Market capitalisation

GBP437m

Research: Real Estate

Impact Healthcare REIT — Strong H1 progress and positive reforms

Recently outlined government proposals for social care reform are positive for the sector, providing additional state funding and a more certain long-term planning environment for providers. In this note we review the continuing resilience of Impact Healthcare REIT’s business model and of its tenants, reflected in a strong H121 financial performance, and future growth prospects.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Impact Healthcare REIT

Strong H1 progress and positive reforms

H121 results

Real estate

30 September 2021

Price

113p

Market cap

£397m

Gross debt (£m) at 30 June 2021

62.4

Gross LTV at 30 June 2021

13.7%

Shares in issue

350.6m

Free float

90.6%

Code

IHR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.3)

1.8

14.3

Rel (local)

(2.1)

1.0

(7.6)

52-week high/low

122p

97p

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

FY21 year-end

31 December 2021

Analyst

Martyn King

+44 (0)20 3077 5745

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

Recently outlined government proposals for social care reform are positive for the sector, providing additional state funding and a more certain long-term planning environment for providers. In this note we review the continuing resilience of Impact Healthcare REIT’s business model and of its tenants, reflected in a strong H121 financial performance, and future growth prospects.

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

1.06

5.5

12/20

30.8

23.1

7.3

109.6

6.29

1.03

5.6

12/21e

37.1

28.0

8.7

112.6

6.41

1.01

5.7

12/22e

42.9

33.0

9.4

117.0

6.57

0.97

5.8

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

H121 results confirm resilient growth

Driven by acquisitions and inflation indexed rent uplifts, H121 cash rents increased by 26% compared with H120 and adjusted ‘cash’ EPS increased 14% to 3.26p. DPS of 3.205p (+1.9%) was 102% covered by adjusted EPS and 128% by EPRA earnings. EPRA NTA increased 1.0% to 110.7p in H121 and including DPS paid the H121 total return was 3.9% (7.8% annualised). With a low 13.7% LTV and c £70m of uncommitted liquidity, Impact is well placed to pursue further acquisitions from a strong pipeline of opportunities (several subject to ongoing exclusive negotiations) adding additional scale and diversification. Our forecasts, set out in our detailed report published in July, are not materially changed. The government’s social care reforms, strongly welcomed by Impact, are aimed at easing the financial burden on those requiring care, providing additional resources to the sector, and giving greater planning certainty to providers, an essential element in ensuring that future needs are met. The government will provide detailed proposals later this year.

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 5.7%, with good prospects for fully covered dividend growth (on both an EPRA basis and an adjusted ‘cash’ basis), with a modest c 2% premium to H121 NAV per share, a discount to peers.

Resilient strategy and tenants generating consistent returns

Strong rent cover back to pre-pandemic levels

Impact’s performance during the pandemic has provided good evidence of the resilience of the group’s strategy and of its tenants. Impact has continued to receive 100% of its contracted rent without changes to lease terms or payment schedules, made possible by an affordable level of rents and strong underlying tenant rent cover.1 Average rent cover across all of Impact’s portfolio is now back at the pre-pandemic level of just under 1.9x, 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 1: Average tenant rent cover of Impact tenants through 2020

Exhibit 2: Average weekly fees charged by Impact’s tenants

Source: Impact Healthcare REIT

Source: Impact Healthcare REIT

Exhibit 1: Average tenant rent cover of Impact tenants through 2020

Source: Impact Healthcare REIT

Exhibit 2: Average weekly fees charged by Impact’s tenants

Source: Impact Healthcare REIT

Tenant rent cover dipped in the early stages of the pandemic as a slowdown in new admissions and an increase in deaths reduced operator occupancy by c 10%, mirroring the industry trend. As occupancy first began to stabilise and has more recently begun to increase again, rent cover has rebuilt, further benefiting from continuing strong fee growth. Average weekly fees in Q221 were c 8% above Q220. The vaccination programme and opening of care homes to visitors has seen pent up demand translate into a normalisation of new admissions while deaths have recently been running below ‘normal’, in combination leading to an occupancy increase. By mid-August, average occupancy had increased to c 83%% from the mid-April low point of c 79% and continues to improve steadily by c 0.2–0.3% per week, which if continued should see occupancy restored to normal levels (c 90%) within six months.

Sustainable rents are key to strategy

Impact has built its portfolio through acquisitions at an attractive average yield of c 7.4%, but management puts a great emphasis on setting rents at a sustainable level, affordable to the operator tenants, while meeting the company’s investment targets and leaving room for Retail Price Index (RPI) linked rental growth. In this process, management sees property acquisition yields as an ‘output’ of its strategy rather than the ‘input’ driving asset selection. Care homes are primarily considered for acquisition based on actual historical performance rather than future potential. The risks as well as future opportunities are considered, but Impact avoids paying for future performance upfront unless there is a clear and identifiable path to improved performance (for example, through asset management), and in such cases will seek deferred payments, linked to achieved performance targets, in return for increased rents. Having established the ‘correct’ level of rent for the home (typically within the range of 11–15% of operator revenues) this is used as the basis for negotiating an acquisition price that will in turn meet Impact’s investment return targets, a process that does not differentiate between the underlying funding sources (private pay or local authority) of the home residents.

Growth brings increased scale, diversification and efficiency

Impact has continued to grow its portfolio, with existing and with new selected tenants to the group, adding further diversification. It acquired four homes late in FY20, three of which are leased to Electus Healthcare, a new tenant for the group, and one to Welford Healthcare (its seventh home leased from Impact). In April 2021 Impact exchanged contracts for two further properties, both let to a new tenant for the group, 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 initial consideration for the two properties is an aggregate £20.8m reflecting net initial yields of 6.3% and 7.1% respectively. The portfolio is now comprised of 111 healthcare properties let to 13 tenants. Of the total, 109 are care homes (107 operational and two under development) and two are healthcare facilities leased to the NHS.

Exhibit 3: Increasingly diversified portfolio

Exhibit 4: Split of income by tenant

Source: Impact Healthcare REIT. Note: *109 care homes let to 12 care operators and two healthcare facilities let to the NHS.

Source: Impact Healthcare REIT

Exhibit 3: Increasingly diversified portfolio

Source: Impact Healthcare REIT. Note: *109 care homes let to 12 care operators and two healthcare facilities let to the NHS.

Exhibit 4: Split of income by tenant

Source: Impact Healthcare REIT

Growth has been achieved while maintaining a moderate level of gearing and has delivered a steady decline in the EPRA cost ratio. The end-H121 gross loan to value (LTV) ratio of 13.7% remained well below the medium-term target of 25% (maximum 35%) ahead of deployment of the April 2021 equity raise proceeds. The EPRA cost ratio reduced to 15.5% in H121, and we expect this trend to continue. The H121 total expense ratio (TER) was 1.50%.

Exhibit 5: Growth with moderate gearing

Exhibit 6: 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 guaranteed rent uplifts and lease incentives.

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

Exhibit 5: 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 guaranteed rent uplifts and lease incentives.

Exhibit 6: Scale economies as net assets increase

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

Further growth planned with funding in place

Impact 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, it is also adding much needed new capacity to the market through forward funding the development of new pre-let homes,2 expanding capacity and the range of services within the footprint of existing homes3, and supporting the development of successful operators within the growing mid-market segment of the care home market. Alongside the recently contracted forward funding of a home in Norwich, pre-let to Carlton Hall, Impact will jointly develop with the operator retirement bungalows within the grounds. This is Impact’s first entry into ‘extra care’.4

  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.

  A significant asset management initiative at Impact’s Fairview Court home in Bristol recently commenced, linking two adjacent buildings, reconfiguring older accommodation to upgrade facilities, add a net 10 beds and improve the EPC rating from C to A.

  Extra care (also referred to as assisted living) blends independent housing with care support.

Impact has a large and active pipeline of potential acquisition opportunities and significant funding headroom to meet these. Total funding headroom at 20 July 2021 was £101.1m, comprising £22.5m in cash (slightly increased from £17.7m at end-H121) and undrawn debt of £78.6m. The proceeds of the April 2021 £35m equity raise have initially been used to repay debt. After allowing for investment commitments (acquisitions yet to complete, capex, forward funding and deferred payments), the available uncommitted headroom was £70.9m and management estimates that fully deploying available debt would take the LTV ratio to 26%, well within the company’s leverage limits. Within the larger pipeline of opportunities there are several identified assets where Impact is in exclusive discussions with vendors. There can be no certainty that these will complete and for all to complete would exceed the currently available resources (Exhibit 7). As discussed below, we have assumed £60m of acquisitions in our forecasts.

Exhibit 7: Liquidity for identified opportunities

Source: Impact Healthcare REIT. Note: *Deferred payments falling due within the next two years.

Attracted by the resilient inflation-linked rents available in the care sector, investor demand remains strong and Impact notes new entrants to the sector such as Cofinimmo from Belgium and Korian REIT from France, as well as a more active approach from Octopus in the UK. This raises the prospect that valuation yields will tighten further, benefiting net asset value (NAV) growth but increasing the prices that must be paid for assets. Nevertheless, management is confident that it will be able to continue its accretive growth.

Government reforms are positive for the sector

The fundamental drivers of the care home sector remain strongly positive, primarily driven by demographics (an ageing population with increasingly complex care needs) with little correlation to the wider economy. In recent years, capacity has failed to keep pace with this growing need and in many cases homes that are more reliant on local authority funding have been starved of the resources to maintain adequate staffing and levels of care. The recently announced reforms to health and adult social care aim to address this and, in management’s view, have the potential to be transformational. The government announced plans for a cumulative £36bn in new investment in health and social care over the next three years, funded by a 1.25% ring-fenced increase in the national insurance levy. It is the government’s intention to improve the integration of the NHS and social care system to both improve outcomes and generate efficiencies (for example, freeing up hospital beds by increasing access to appropriate alternative care. Most of this new funding will go to the NHS, but £5.4bn pa of additional social care funding, including residential care for the elderly, will be available from 2022–25. The government will set out a detailed plan in a ‘white paper’ later in the year that is expected to make clear exactly how the new proposals will operate. Depending on the detail, as well as providing additional resources to fund more and better services, the reforms have the potential to provide greater certainty to care home operators in their long-term planning, an essential element in making sure that future need are met.

Under the government’s proposals, more people will become eligible for state support for social care, including elderly care, and from October 2023 nobody will pay more than £86,000 for adult social care in their lifetime. Those with assets of less than £20,000 will have their care costs fully met by the state and those with assets of between £20,000 and £100,000 will receive some means-tested state support, compared with the current support cut-off on assets of more than £23,250.

Combined with the growing, demographically-driven need for elderly care, the reduced funding burden on individuals is likely to increase the number of requests that local authorities receive for long-term care. In 2019/20, of the 1.9m requests to local authorities (of which 1.4m were from elderly people), only 839,000 received the care support requested, primarily reflecting limited resources available. The fees paid by local authorities to providers are currently too low and are reset annually, making it difficult for the providers to plan and recruit or retain staff. Because of low fees, local authority-funded recipients of residential care are subsidised by privately funded residents and the government is keen to address this and ensure that local authorities pay a ‘fair rate’. While this appears to be positive for fees, the government is also proposing that self-funders will be able to ask their local authority to arrange their care for them so that they may find better value care. It remains to be seen how this will work in practice, although it seems unlikely that providers will be willing to accept lower fees, especially for existing residents.

Impact very much welcomes the reforms, while making it clear that it awaits further details on how the additional resources will be allocated and how the proposals will work in practice. For providers, the potential benefits are clear and for the elderly, the funding burden has eased, most clearly for the less well off. It may therefore be the case that care homes more heavily dependent on local authority and NHS-funded residents have the most to gain. Local authority fee exposure (both wholly funded or part local authority funded with private top-ups) for Impact’s tenants has increased through the pandemic, but not at the cost of fee growth, as shown in Exhibit 2. Behind this shift in the breakdown of fee sources is the greater discretion that privately funded residents typically have in respect of the timing of admission. A continuation in the recovery of home occupancy should see the private pay share increase. For those with a specific medical need, the NHS already provides c 9% of the funding for Impact’s tenants. For these residents, both the care needs and fees are typically much higher than local authority fees.

Exhibit 8: Sources of income for Impact tenant operators

Source: Impact Healthcare REIT, 30 June 2021

Summary of H121 financial performance

The H121 results showed strong year-on-year growth driven by acquisitions and inflation linked (predominantly RPI) rent growth. With an end-H121 contracted rent roll of £33.8m there is further growth embedded in the portfolio (as recent acquisitions/commitments fully complete) before the further portfolio growth that we expect, off a strong and liquid balance sheet. The increased dividend is now fully covered on an adjusted ‘cash’ basis (and well covered on an EPRA basis) and we expect both dividends and cover to increase further.

Exhibit 9: Summary of H121 financial performance

£m unless stated otherwise

H121

H120

H121/H120

H220

Cash rental income

14.6

11.6

26%

14.3

IFRS rent smoothing & lease incentive adjustments

3.2

3.2

1.7

Net rental income

17.8

14.8

20%

16.0

Administrative and other expenses

(2.8)

(2.4)

(2.8)

Operating profit before change in fair value of investment properties

15.1

12.4

21%

13.1

Change in fair value of investment properties

1.0

(0.4)

6.0

Profit on disposal of investment property

0.0

0.0

0.2

Operating profit

16.1

12.0

19.3

Net finance expense

(1.6)

(0.9)

(1.6)

Profit before and after tax

14.5

11.1

17.7

EPRA adjustments

Realised & unrealised gains on investment property

(1.0)

0.4

(6.2)

Change in fair value of interest rate derivative

(0.0)

0.1

0.0

EPRA earnings

13.5

11.6

16%

11.6

Company specific earnings adjustments:

IFRS rent smoothing adjustments

(3.2)

(3.2)

(1.7)

Amortisation of loan arrangement fees

0.4

0.3

0.4

Other

0.0

0.5

(0.5)

Adjusted earnings

10.7

9.1

17%

9.8

Other data:

IFRS EPS (p)

4.41

3.46

5.56

EPRA EPS (p)

4.10

3.62

13%

3.68

Adjusted EPS (p)

3.26

2.86

14%

3.12

DPS declared (p)

3.205

3.145

2%

3.145

DPS cover (EPRA earnings)

128%

115%

117%

DPS cover (adjusted earnings)

102%

91%

99%

Investment properties at valuation

432.4

346.0

418.8

Gross debt

62.4

76.1

76.4

Gross LTV

13.7%

18.1%

17.8%

Net assets

388.0

341.8

349.5

EPRA NTA per share (p)

110.7

107.2

3%

109.6

EPRA NTA total return

3.9%

3.3%

5.2%

Source: Impact Healthcare REIT data, Edison Investment Research

Key features of the interim results included:

Year-on-year growth in net rental income of 20% included a 26% increase in cash rents (excluding non-cash IFRS rent smoothing adjustments).

Including an increase in the number of shares in issue, EPRA EPS increased c 13% to 4.10p and adjusted ‘cash’ EPS by c 14% to 3.26p.

The EPRA cost ratio improved to 15.5% (H120: 16.4%). The TER of 1.5% increased on H120 (1.42%) as a result of the increased equity base, yet to be fully deployed on a geared basis.

H121 DPS increased by 1.9% to 3.205p (FY21 target 6.41p) and was 128% covered on an EPRA basis and 102% covered by adjusted earnings.

EPRA net tangible assets per share (EPRA NTA) increased 1.0% from end-FY20 and including DPS paid the total return was 3.9% (an annualised c 7.8%).

Forecasts and valuation

No change to forecasts

We have made no material changes to our forecasts, explained in detail in our July Outlook, and summarised below.

Exhibit 10: Summary of key forecast data.

£m unless stated otherwise

FY20

FY21e

FY22e

EPRA earnings

23.1

28.0

33.0

IFRS rent adjustments

(4.9)

(6.3)

(6.6)

Amortisation of loan arrangement fees

0.7

0.9

0.9

Adjusted 'cash' earnings

18.9

22.6

27.3

EPRA EPS (p)

7.25

8.66

9.42

Adjusted EPS (p)

5.93

6.98

7.79

DPS (p)

6.29

6.41

6.57

EPRA dividend cover

115%

135%

143%

Adjusted earnings dividend cover

94%

109%

119%

EPRA NTA per share (p)

109.6

112.6

117.0

Source: Impact Healthcare REIT FY20 data, Edison Investment Research forecasts

The company adjusted earnings measure excludes non-cash IFRS rent smoothing adjustments (relating to fixed rent increases and lease incentives) and amortisation of loan arrangement fees. Adjusted earnings approximate to cash earnings and a more conservative indicator of dividend paying capacity than EPRA earnings. We forecast 109% cover of dividend by adjusted earnings in FY21 (135% cover on an EPRA earnings basis), increasing to 119% (144% on an EPRA basis) in FY22. Increasing dividend cover demonstrates the strong cash flow emerging from the growing portfolio. Under the company’s progressive dividend formula, linked to rental growth, the 2.5% DPS growth that the company targets (and we expect) for FY21 looks back to rent indexation achieved in FY20. The increase in cover that we forecast indicates there may be scope for future dividend growth beyond the level suggested by this formula, although we have not forecast this.

Our forecasts are based on an additional £60m of capital deployment by the end of Q122 (March 2022) and 3% RPI-linked rent uplifts in FY22. 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. We estimate the assumed acquisitions represent 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 expect property revaluation movements will continue to be driven by rental growth and asset management initiatives in combination with ‘buying well’, contributing to NAV growth.

Exhibit 11: Income statement revaluation movement

£m

FY20

FY21e

FY22e

Gross revaluation movement

13.1

14.5

12.9

Acquisition costs capitalised

(2.7)

(2.9)

(1.0)

Net revaluation movement

10.5

11.6

11.9

IFRS rental smoothing adjustment and lease incentives

(4.9)

(7.0)

(6.8)

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

5.6

4.6

5.2

Acquisition costs as % purchase value

3.1%

4.7%

3.7%

Gross revaluation as % opening portfolio value

4.1%

3.5%

2.6%

Gross revaluation gain per share (p)

4.1

4.1

3.7

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

Valuation

The current year DPS target of 6.41p (+1.9% vs FY20) represents an attractive yield of 5.7%. The shares trade at a c 2% premium to H121 NAV per share, similar to the average premium since IPO and below the high of c 11%.

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 NAV total return (adjusted for dividends paid, but not reinvested) from IPO to end-H121 of 38.1%, a compound annual return of 7.8%. We believe this is attractive in the low interest rate environment that has persisted since IPO, even though slightly below the company’s medium-term return target of 9% pa. Increasing inflation is positive for rental growth.

Exhibit 12: NAV total return history*

2017

2018

2019

2020

H121

From IPO to end-H121

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

110.7

110.7

Dividends paid (p)

3.0

6.0

6.1

6.3

3.2

24.6

Annualised NAV total return

7.2%

8.5%

9.5%

8.5%

7.8%

38.1%

Average annualised return

7.8%

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

In Exhibit 13 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 13: Peer group comparison

WAULT
(years)

Price
(p)

Market cap (£m)

P/NTA*
(x)

Yield**
(%)

Target yield*** (%)

Share price performance

1 month

3 months

YTD

12 months

Assura

11

72

1926

1.26

3.9

4.1

-8%

-3%

-6%

-7%

Civitas Social Housing

23

88

550

0.82

6.2

6.3

-17%

-23%

-16%

-16%

Home REIT

20

108

267

1.05

2.3

5.1

-3%

-2%

N/A

N/A

Primary Health Properties

12

152

2143

1.31

4.0

4.1

-10%

-2%

-1%

2%

Target Healthcare

29

115

526

1.04

5.8

N/A

-2%

0%

1%

10%

Triple Point Social Housing

26

96

385

0.90

5.4

5.4

-11%

-8%

-14%

-11%

Average

20

1.06

4.6

5.0

-8%

-6%

-7%

-4%

Impact Healthcare

20

113

397

1.02

5.6

5.7

-3%

2%

4%

15%

UK property sector index

1,831

-6%

5%

15%

29%

UK equity market index

4,073

-1%

1%

11%

24%

Source: Company data, Refinitiv price data at 30 September 2021. Note: *Based on last published EPRA NTA/NAV per share. **Based on trailing 12-month DPS declared. ***Based on company target DPS for current financial year.

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’s share price performance has been stronger than the average for 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 weighted average unexpired lease term (WAULT) 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.

Exhibit 14: 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 & lease incentives

(0.1)

3.4

4.9

4.9

6.3

6.6

Net rental income

9.4

17.3

24.0

30.8

37.1

42.9

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

36.9

Change in fair value of investment properties

2.4

4.1

9.1

5.6

4.6

5.4

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

35.9

42.3

Net finance cost

0.0

(0.7)

(2.1)

(2.5)

(3.3)

(3.9)

Profit before taxation

9.5

16.5

26.3

28.8

32.6

38.4

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

32.6

38.4

Adjust for:

Change in fair value of investment properties

(2.4)

(4.1)

(9.1)

(5.6)

(4.6)

(5.4)

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

33.0

Rental income arising from recognising rental premiums & fixed rent uplifts

0.1

(3.4)

(4.9)

(4.9)

(6.3)

(6.6)

Amortisation of loan arrangement fees

0.0

0.2

0.4

0.7

0.9

0.9

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

323.9

350.6

Basic & diluted IFRS EPS (p)

5.82

8.57

10.37

9.02

10.07

10.95

Basic & diluted EPRA EPS (p)

4.35

6.47

6.95

7.25

8.66

9.42

Basic & diluted adjusted EPS (p)

4.39

5.17

5.26

5.93

6.98

7.79

Dividend per share (declared)

4.50

6.00

6.17

6.29

6.41

6.57

EPRA earnings dividend cover

97%

108%

113%

115%

135%

143%

Adjusted earnings dividend cover

98%

86%

85%

94%

109%

119%

BALANCE SHEET

Investment properties

156.2

220.5

310.5

405.7

477.2

514.5

Other non-current assets

1.7

5.7

10.1

15.9

22.9

29.4

Non-current assets

157.9

226.2

320.7

421.6

500.0

544.0

Cash and equivalents

38.4

1.5

47.8

8.0

11.2

9.2

Other current assets

0.1

0.6

0.6

0.1

0.5

0.5

Current assets

38.5

2.1

48.3

8.1

11.7

9.7

Borrowings

0.0

(24.7)

(23.5)

(74.2)

(110.3)

(136.2)

Other non-current liabilities

(1.7)

(1.9)

(1.8)

(2.8)

(2.7)

(2.7)

Non-current liabilities

(1.7)

(26.6)

(25.2)

(77.0)

(113.0)

(138.9)

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

394.9

410.4

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

394.9

410.4

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

112.6

117.0

EPRA NAV per share

100.6

102.9

106.8

109.6

112.6

117.0

CASH FLOW

Net cash flow from operating activities

8.2

10.0

14.9

21.0

24.7

30.9

Purchase of investment properties (including acquisition costs)

(153.3)

(55.1)

(73.4)

(88.5)

(64.4)

(28.0)

Capital improvements

(0.5)

(3.9)

(8.2)

(1.7)

(2.5)

(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)

(66.9)

(31.9)

Issue of ordinary share capital (net of expenses)

189.3

(0.1)

132.2

0.0

34.6

0.0

(Repayment)/drawdown of loans

0.0

26.0

(0.9)

51.2

36.0

25.0

Dividends paid

(5.3)

(11.6)

(16.1)

(20.0)

(21.9)

(22.9)

Other cash flow from financing activities

0.0

(2.3)

(2.2)

(2.8)

(3.3)

(3.1)

Net cash flow from financing activities

184.0

12.0

112.9

28.5

45.5

(1.0)

Net change in cash and equivalents

38.4

(36.9)

46.3

(39.8)

3.3

(2.1)

Opening cash and equivalents

0.0

38.4

1.5

47.8

8.0

11.2

Closing cash and equivalents

38.4

1.5

47.8

8.0

11.2

9.2

Balance sheet debt

0.0

(24.7)

(23.5)

(74.2)

(110.3)

(136.2)

Unamortised loan arrangement costs

0.0

(1.3)

(1.7)

(2.2)

(2.1)

(1.2)

Net cash/(debt)

38.4

(24.5)

22.7

(68.4)

(101.1)

(128.2)

Gross LTV (net debt as % gross assets)

0.0%

11.4%

6.8%

17.8%

22.0%

24.8%

Source: Impact Healthcare REIT, Edison Investment Research


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.

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Frankfurt +49 (0)69 78 8076 960

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60325 Frankfurt

Germany

London +44 (0)20 3077 5700

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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

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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

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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