Impact Healthcare REIT : Annual Report and Financial Statements 2023

2023 Annualreportandfinancialstatements

Impact

Healthcare

REIT

About us

Impact Healthcare REIT plc is a specialist and responsible owner of care homes and other healthcare properties across the UK.

We take a long-term view and look to generate secure and growing income. This has allowed us to offer attractive and progressive dividends to our shareholders, and the potential for capital growth.

Our purpose

Our purpose is to work with tenants to provide quality, affordable and sustainable care homes in order to deliver an attractive risk adjusted return.

Our values

• • We focus on the long-term sustainability of our business.

• • We are open and transparent with our stakeholders.

• • We are a dependable partner who's trusted to deliver.

• • We combine the strengths of a listed company with entrepreneurship.

Contents

1

Strategic report

About us

IFCWe're helping to meet the growing

need for care beds for the elderly 2

2023 in brief 4

The social need for care beds for the elderly 7

Delivering risk-adjusted returns |

Our business model 10

Putting our purpose into practice

1 | Growing the business to provide

much-needed care home beds 12

2 | Working with our tenants 18

3 | Our focus on quality 23

4 | Our focus on affordability 29

5 | Increasing our sustainability 34

Risk management is integral to the

way we manage our business 39

Financial statements

Consolidated statement

of comprehensive income 75

Consolidated statement

of financial position 76

Consolidated statement

of cash flows 77

Consolidated statement

of changes in equity 78

Notes to the consolidated

financial statements 79

Company statement

of financial position 98

Company statement

of changes in equity 99

Notes to the Company

financial statements 100

Financial review

43 Additional information

Going concern 46

Section 172 statement 47

Governance

Our board 49

Corporate governance review 51

Working with the Investment Manager 55

Nomination committee report 57

Audit committee report 58

Directors' remuneration report 60

Directors' report 63

Statement of responsibilities 67

Independent auditor's report 68

Reporting against the Task Force on Climate-Related Financial Disclosures

framework 105

Applying the AIC Code Principles 113

EPRA performance measures 115

Notes to the EPRA performance measures 118

Alternative performance measures 121

Our portfolio 122

AIFM statement 125

Investment policy 126

How we manage risk 127

Glossary 130

Corporate information 131

Financial calendar 131

• 1. Includes Minster and Croftwood, which are subsidiaries of Minster Care Group, and Melrose, which is an affiliate of Minster Care Group.

• 2. Includes properties invested in via loans to operators where the Group has an option to acquire.

• 3. Contracted rent roll is a defined term in the Glossary, this includes contractual rent on temporarily varied leases (including Melrose).

We're helping to meet the growing need for care beds for the elderly

The UK needs more care beds for the elderly

We're a real estate company that's deeply immersed in the social infrastructure of this country.

The UK has an ageing population, with the number of over 75s set to nearly double in the next 50 years. Demand for care home beds is therefore rising, but supply has changed little for almost three decades. This has important implications for the care older people receive, as well as for our wider healthcare system. Many thousands of older people find themselves stuck in hospital because there are no free care home beds or step-down care places to take them.

Our purpose and strategy reflect the need for more care beds for the elderly

Our purpose is to work with tenants to provide quality, affordable and sustainable care homes in order to deliver an attractive risk adjusted return. This purpose and our business model determine our strategic priorities. These are to:

Our society needs a thriving care home sector, which can provide the care older people need and relieve the pressure on the NHS. In short, the care home sector is vital to the health and wellbeing of everyone in the UK.

Grow our businessWork with our tenantsFocus on qualityMaintain affordabilityIncrease our sustainability

By adding assets to the portfolio while carefully managing risk, so we can invest in care home beds for more of the people who need them;

To form long-term, mutually beneficial partnerships, so we can grow together;

By investing in our buildings and supporting our tenants to provide quality care to their residents;

By seeking to set initial rents at affordable levels, which our tenants can afford both now and in the long term. This in turn helps them to charge fees that are likely to be more affordable to residents; and

By continuing to improve our portfolio's social and environmental sustainability.

See more on pages 12 to 17	See more on	See more on	See more on	See more on pages 34 to 38
pages 18 to 22	pages 23 to 28	pages 29 to 33

We're helping to meet the growing need for care beds for the elderly continued

We have opportunities to create value

We currently own 1.7% of a highly fragmented market. Successfully implementing our strategy gives us substantial scope for long-term growth. Our focus on generating secure income from a growing portfolio allows us to offer attractive and progressive dividends to our shareholders, alongside the potential for capital growth. In the process, we add value for our tenants by helping them to grow their businesses, so they in turn can provide high standards of care to more people.

Impact Health Partners LLP, our Investment Manager (IM), plays a vital role in our success. Its senior team has decades of experience of owning and operating healthcare real estate, and their knowledge, skills and relationships give us an important advantage in our market.

2023 in brief

Our financial performance was robust and we made further progress with our strategy

Putting our purpose into practice: delivering attractive risk-adjusted returns

Our objectives are to generate:

• • a progressive dividend that's fully covered by adjusted1 earnings per share (EPS); and

• • an average total accounting return of 9.0% per annum2.

Achieving these goals requires us to grow our profit, cash earnings and the value of our assets, to produce an attractive overall return.

Despite some risks materialising in the year, we were able to deliver our highest total accounting return of the past five years and a growing dividend fully covered by adjusted EPS.

Our performance highlights in 2023 included the following

• • We met our dividend target for 2023 of 6.77 pence per share, with the total dividend being 108% covered by adjusted EPS and 123% by EPRA EPS.

• • The value of our property investments rose by 4.1% on a like-for-like basis (2022: (8.1)% like-for-like reduction). This was mainly due to inflation-linked rental growth which contributed to NAV per share increasing by 4.7%.

• • Total accounting return improved by

  • over seven percentage points to 10.82%,

    reflecting more stable asset values compared with 20222.

• • Our dividend target for 2024 is 6.95 pence per share, up 2.66%2.

• 1. Adjusted EPS strips out non-cash and one-off items. See note 11 on page 83 for the calculation.

• 2. This is a target only and not a profit forecast. There can be no assurance that the target will be met and it should not be taken as an indicator of the Company's expected or actual results. Total accounting return reflects the dividend we pay and growth in the value of our assets (see page 121 for the calculation). We expect higher valuations to mainly result from rising rents and our asset management projects, rather than relying on wider market improvements.

• 3. For further discussion of these metrics, see page 121. EPRA alternative performance measures have been calculated in line with EPRA best practices recommendation, see pages 115 to 120.

2023 in brief continued

Putting our purpose into practice: growing the business so we can invest in much-needed care home beds

We continued to grow the portfolio during the year, with a net increase of five homes. This resulted from:

• • buying a portfolio of six homes for £56 million, on a net initial yield1 of 7%; and

• • selling one non-core asset for £1.25 million, in line with its book value.

At the year end, the key indicators of growth in our portfolio compared to the prior year were as follows:

Working with our tenants

We work closely with our tenants to identify ways we can grow together, while keeping a close eye on their financial and operational performance. During 2023:

• • higher occupancy and strong fee increases

  (see below) contributed to improved financial performance for most of our tenants;

• • one tenant, Silverline, got into financial difficulties. We took firm action and successfully transferred their seven homes to another tenant2 on variable rent. Trading in these homes has shown good signs of improvement since the transfer. Silverline's issues reduced our rental income for 2023 by £1.2 million;

• • we expanded our relationship with Welford, which operates the six care homes we bought in 2023. Welford now runs 18 of our homes with 1,094 beds, making it one of our largest tenants; and

• • our long-term partnership approach to our tenants is reflected in weighted average unexpired lease term (WAULT)3 of 20.8 years at 31 December 2023 (31 December 2022: 19.7 years), with the increase reflecting new 30 and 35-year leases entered into during 2023.

• 100% Putting our purpose into practice:

• 100% our focus on quality

  Improving the quality of our assets

  We continue to invest in our assets to improve

• £48.8m the environment for residents and staff, enableour tenants to broaden their offer (for example, by adding specialist dementia beds) and to make them more environmentally sustainable. We typically rentalise these inflation-linked investments at 8%, which means we earn an

extra £8 in annual rent for every £100 we invest.

• 1. The net initial yield is the annual rent generated by the assets, less non-recoverable property costs, divided by the assets' value.

• 2. These leases were transferred to Melrose, an affiliate of a related party, Minster Care Group.

• 3. The WAULT is the average unexpired lease term of the property portfolio, weighted by annual passing rents. The passing rent is the actual rent a tenant is paying at that point in time.

• 4. This is the net income from the portfolio (rent less irrecoverable property costs) divided by the total amount

In 2023:

• • we approved £11.7 million new asset management projects;

• • delays to some projects resulted in our actual investment in existing asset management projects in the year being lower than expected, at £4.7 million; and

• • at the year end, we had four projects in the pipeline, with anticipated funding of £9.5 million over the next two to three years.

In addition to our total accounting return and the WAULT, the quality of our portfolio is reflected in the following metrics:

• • The NIY indicates the portfolio's ability to generate income, in comparison to its market value. It has improved during the year, reflecting a general trend of larger, better specified homes in our area of the market seeing improvement in their valuation yield.

• • Occupancy continued to recover from the lows during the pandemic, showing our assets remain attractive to potential residents. We've seen signs that tenants are prioritising fee increases (see below) over filling empty beds, resulting in occupancy remaining around half a percent below the pre-pandemic average.

Our tenants continue to provide good care

While the quality of our assets is important, the quality of care our tenants provide to their residents is paramount: poor care in a great building is still poor care.

At the end of 2023, 80.6% of our homes were rated good or outstanding by the regulator. This was above the national average of 79% for comparable homes5.

Putting our purpose into practice: maintaining affordability

With our leases running for up to 35 years, it's vital that our rents remain affordable to

tenants in the long term. We therefore look to set initial rents at sustainable levels and then

increase them only with inflation each year. Almost all our leases set out minimum and maximum annual increases, which are typically

2% and 4% respectively.

We monitor affordability using the following metrics:

a purchaser would have to pay to buy the assets (the market value plus the estimated costs the purchaser would incur). See page 119 for the full calculation.

5. Homes outside of England are inspected by different regulatory bodies and rated on a separate system, in our reported metric we have aligned these ratings to those used by the CQC.

6.

Rent cover is a defined term in the Glossary, it is our tenants' EBITDARM (earnings before interest, tax, depreciation, amortisation, rent and management charges) divided by total annual rent. EBITDARM is a useful approximation for our tenants' cash earnings, which they can use to pay their rent. This has been adjusted to exclude seven turnaround homes and one new home in build-up.

2023 in brief continued

Putting our purpose into practice: maintaining affordability continued

• • Rent cover is one of our most important key performance indicators. The increase in the year reflects improved occupancy, and in particular, our tenants' ability to continue to increase their fees in line with or ahead of inflation. The average weekly fee across the portfolio increased by 13.3% to £1,049 during 2023.

• • Our tenants' staff costs have benefited from reduced agency staff use, which declined from an average of 8.9% of their revenue to 4.7% in the year. The rate of inflation for other key costs such as energy and food came down in the second half of the year.

• • Rent reviews in the year increased rents by 4.1% on average, adding £1.6 million to the contracted rent roll.

• • One test to measure the sustainability of our rents over the long life of our leases is the percentage of their revenues our tenants pay in rent, with anything over 15% being potentially too high. In 2023 on average they paid 12.6% of their revenues to us in rent, down from 13.2% in 2022.

• • We collected 99% of rent due in respect of the year, with all tenants other than Silverline paying in full.

Putting our purpose into practice: increasing our sustainability

We continued to focus on improvements to the environmental sustainability of our portfolio with a target to achieve net zero status by 2045. During 2023, we continued to improve the energy efficiency of homes through asset management projects and improved energy performance certificate (EPC)1 ratings through further energy efficiency projects.

We are also focusing on reducing the carbon emissions per m2. During the year these increased slightly from 50kg to 54kg which is in part explained by the increased occupancy over the past two years while the improvements we are focusing on are taking time to embed. Reducing this metric remains a core focus, with an interim target to reduce by 15% by the end of 2025.

We also carried out "deep-dive" sustainability surveys of six homes, to inform our net zero delivery plan and ensure that our tenants' businesses and the care they provide can continue sustainably.

Carbon emissions (kg CO2e per m2)

54kg
2023	54
2022	50
+8%
EPC B and above
57%
2023	57%
2022	53%
+4% pts

Prudently financing the business

We use debt financing to support our growth and increase returns, while making sure we have a strong balance sheet at all times.

We use the following metrics to monitor our financial position:

During 2023 we:

• • increased our revolving credit facility (RCF) with NatWest by £24 million to £50 million, extended the term from 2024 to 2028, and extended the term on our £75 million RCF with HSBC by one year to 2026;

• • paid off the remaining £15 million of our term loan with Metro Bank, which was our most expensive debt; and

• • increased our interest rate hedging by a net £75 million.

• 1. An EPC rates a property's energy efficiency from A (most efficient) to G (least efficient). See page 37 for further explanation on the country level alignment of EPCs.

2.

EPRA (net) LTV is calculated using net debt to gross portfolio valuation. See page 120 for the full calculation.

At the year end:

• • the increase in LTV during 2023 was largely to finance the acquisition of a portfolio of six care homes in January 2023 (see page 17). This acquisition was accretive to earnings during the year after taking into account these additional financing costs;

• • we had committed bank facilities of £250 million, with a weighted average term (excluding options to extend) of 6.3 years;

• • we had significant liquidity available to us, with £65.2 million of undrawn facilities and £9.4 million of cash, against commitments of £16.2 million;

• • the average cost of our drawn debt was 4.56%, with 95% of our drawn facilities fixed or hedged against interest rate rises; and

• • our LTV was well within the maximum in our policy of 35%.

Outlook

We're well positioned to continue to deliver long-term sustainable returns to shareholders. As the economy recovers from 2023's high inflation and interest rate rises, and as the government sees the role that this sector can play in both health and the economy, we believe that we'll see more opportunities for growth in the future.

The social need for care beds for the elderly

Demand for care beds for the elderly is rising

There are 6.5 million people aged over 75 living in the United Kingdom in 2024. That number is forecast to increase by 55%, to 10.1 million over the next 25 years. The over 75s are the fastest growing part of the UK population. These increases will happen during the lives of our long leases.

Demand: UK elderly population growth, 75 years + (000s)

80,000

UK population 2024

Aged 0-14

Aged 15-29

Aged 30-44

Aged 45-59

Aged 60-74

Aged 75+UK population 2049

Source: ONS.

Projected UK population aged over 75 (000s)

11,00014.0%

7,00010.0% 6,0009.0% 5,0008.0%

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

2041

2042

2043

2044

2045

2046

2047

2048

2049

UK population aged over 75 (LHS)Percentage of UK population aged 75+ (RHS)

Source: ONS.

The social need for care beds for the elderly continued

Construction costs have risen substantially over the past two years, making it difficult to deliver a high quality new care home for less than £200,000 per bed. In contrast, an older home with an established record for providing good quality care can cost less than £100,000 per bed, which we believe offers a better risk adjusted return. Given the higher capital costs of brand new homes, tenants have to pay higher rents - up to 20% of their revenues as opposed to our average of 12.6% - which means that they in turn have to pass these costs on by charging higher fees to their residents. Higher fees do not automatically translate into better quality care, which depends more on the quality and stability of the team than the building.

Care needs are becoming more complex

While rising life expectancies are good news, the downside is that most people will spend the last 15 years of their life with some ill health. Around 10% of people over 80 have care needs that make it difficult for them to live at home.

Many people end up stuck in hospital beds, which means they're in the wrong setting for the type of care they need, particularly if they have dementia, and this increases costs for the NHS. On average during 2023 there were just over 12,000 people in hospital every night who had no clinical reason to be there but could not be safely discharged. Half of those people, nearly all of them elderly, had been waiting more than 21 days to be discharged. This "bed blocking" also has a knock-on effect on other patients in the NHS, who can't be admitted to hospital without a vacant bed.

Since the COVID-19 pandemic, there's evidence that people are moving into care homes later than before, that they're more likely to be frail or ill and that their stays are shorter. This is creating a longer term shift in the industry, with increasing demand for care providers who can deliver higher acuity care.

Dementia is the most common acute condition affecting people in care homes. Around 70% of care home residents suffer from some form of memory loss, which ranges from being mildly confused to severe dementia. The Alzheimer's Society projects that the number of people with some form of dementia in the UK will rise from just over 900,000 in 2020, to over 1.2 million in 2023, with the greatest rise being amongst people who have a severe form of the condition. By 2022 dementia and Alzheimer's diseases had already replaced heart disease and cancer as the leading cause of death in England and Wales.

The number of care beds isn't responding to demand

Despite the ageing population and rising acuity, the number of available care beds for elderly care has been stagnant. Between 2012 and 2021, the number of beds in nursing and residential care homes fell from 11.3 per 100 people aged over 75 to 9.4 - a 17% decrease. Looking at longer-term trends, an estimated 25% of over 85s lived in care homes for the elderly in 1996. By 2017, this had fallen to 15%. This reflects several factors, including a shift in social care policy towards home care. It might also reflect an element of rationing in the care system, as many older people struggle to access the care they need.

Although the care home market is attractive, for existing care homes the economics make it difficult to create much new supply.