6 Financial risk management

Overview

The section ‘Report of the Fund Manager’ describes the risk management framework of the AL&C Fund with defined risks. In this section, risks are grouped with an emphasis on financial risk and its impact on the financial statements. For a description of the internal control framework, we refer to the risk management paragraph in the report of the Fund Manager.

The AL&C Fund is exposed to the following financial risks:

1. market risk;

1. 1. real estate risk

   2. interest rate risk

2. credit risk;

3. liquidity risk (including funding risk).

The AL&C Fund manages these risks using the services provided by the Fund Services Provider. The Fund Services Provider has in-house knowledge and expertise in order not to depend entirely on third parties. This is very important for mitigating risks.

The Fund Services Provider delivers various services such as Compliance, Legal, Human Resources Management, Payment Process, Business Continuity Management, Information Management, and Research. An internal control system according to the International Standards of Assurance Engagements 3402 Type II is in place. An external auditor has tested this based on defined controls.

The AL&C Fund invests in healthcare residential properties in the Netherlands. The following describes the risks involved and the risk management applied.

(a) Market risk

(i) Real estate risks

The yields available from investments in healthcare residential real estate depend primarily on the amount of income earned and capital appreciation generated by the relevant properties, as well as expenses incurred.

If properties do not generate revenues sufficient to meet expenses, including capital expenditures, the AL&C Fund’s income will be adversely affected.

Income from properties may be adversely affected by the general economic climate, local conditions such as oversupply of properties or a reduction in demand for properties in the market in which the AL&C Fund operates, the attractiveness of the properties to tenants, the

quality of the management, competition from other available properties, and increased operating costs (including real estate taxes).

In addition, income from properties and/or real estate values is also affected by factors such as the cost of regulatory compliance.

Investments made by the AL&C Fund are generally illiquid. The eventual liquidity of all investments of the AL&C Fund will be dependent upon the success of the realisation strategy proposed for each investment, which could be adversely affected by a variety of risk factors.

Realisation of the AL&C Fund’s assets, for instance in connection with redemption requests, on termination or otherwise, could be a process of uncertain duration.

In addition, the AL&C Fund’s income would be adversely affected if the care provider were unable to pay rental or if its properties could not be rented on favourable terms.

Certain significant expenditures associated with each equity investment in real estate (such as real estate taxes and maintenance costs) are generally not reduced when circumstances cause a reduction in income from properties.

The report from the management describes the main aspects of the AL&C Fund’s portfolio strategy. By implementing the described strategy, management expects to mitigate the above real estate risks to an acceptable level.

Management expects to lower the portfolio’s risk profile by diversifying and concentrating on focus areas, rent level (i.e. affordability) and risk categories. 

All properties are appraised externally by the end of each quarter by independent healthcare experts. CBRE Valuation Advisory, Capital Value and MVGM Vastgoed taxaties appraised all properties in the portfolio using the yield method (BAR/NAR) supported by a DCF calculation in accordance with the MSCI guidelines applicable in the Netherlands.

The appraisals for each property are executed by two independent experts from each appraiser, with both independent experts having to agree on the value of the individual property.

Every year, approximately 20% of all properties circulate among the external appraisers. The total fee charged by the external appraisers for 2023 was EUR 208,000.

(ii) Interest rate risks

The AL&C Fund’s exposure to interest rate risk is very limited as the AL&C Fund does not borrow funds. A non-material interest rate risk is applicable on the cash and cash equivalents position. Remaining capital commitments are adequate to cover investment while borrowing and thus interest rate risks is not foreseen for the short term. 

(b) Credit risk

Credit risk is the risk of financial loss to the AL&C Fund if a customer or counterparty to a financial instrument fails to meet its contractual

obligations, and arises principally from the AL&C Fund’s receivables from customers and investments in debt securities.

The carrying amounts of financial assets and contract assets represent the maximum credit exposure. Impairment losses on financial assets and contract assets recognised in profit or loss are included in relevant notes.

The AL&C Fund has adopted a policy of dealing only with creditworthy counterparties and of obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. The AL&C Fund’s exposure is monitored and the RCO of the Fund Services Providers checks parties concerning relevant contracts before signing any of them (customer due diligence).

Credit risk management for care providers as tenants

Ongoing credit evaluation is performed for the financial condition of accounts receivable, and where deemed appropriate, a bank guarantee or a deposit is obtained.

The AL&C Fund’s credit risk is primarily attributable to its rental receivables and lease receivables. The amounts presented in the statement of financial position are net of allowances for doubtful receivables, estimated by the AL&C Fund’s management based on prior experience and their assessment of the economic environment.

On the reporting date, there are no significant concentrations of credit risk. The carrying amount reflected in the statement of financial position represents the AL&C Fund’s maximum exposure to credit risk for tenants.

Credit risk management for financial instruments

The AL&C Fund does not have any significant credit risk exposure to a single counterparty. The AL&C Fund adopted the policy of minimising the credit risk by dealing only with banks with positive credit ratings assigned by international credit rating agencies.

Except as detailed in Table B on page 46, the carrying amount of the financial assets recorded in the financial statements, grossed up for allowances for losses, represents the AL&C Fund’s maximum credit risk exposure without taking account of the value of any collateral obtained.

The AL&C Fund has a concentration of credit risk, with exposure spread over a limited number of care providers. AL&C Fund has assessed these customers by performing due diligence procedures at inception and gaining insight into the organisations’ key decisions. Counterparty risk is assessed each year. Remaining concentration risk is accepted by management.

Expected credit loss assessment as at 1 January and 31 December 2023

For trade receivables, the AL&C Fund allocates each exposure to a credit risk grade based on historical data. For exposures within each credit risk grade, an ECL rate is calculated based on delinquency status and actual credit loss experience over the past three years. These rates are multiplied by scalar factors to reflect differences between economic conditions during the period over which the historical data has been collected, current conditions and the AL&C Fund’s view of economic conditions over the expected lives of the receivables.

The AL&C Fund held cash and cash equivalents of EUR 19,518 thousand at 31 December 2023 (2022: EUR 11,231 thousand). The cash and cash equivalents are held with bank, which currently is assigned a A credit rating, by Standard & Poors. Impairment on cash and cash equivalents has been measured on a 12-month expected loss basis and reflects the short maturities of the exposures. The AL&C Fund considers that its cash and cash equivalents have low credit risk based on the external credit ratings of the counterparties.

The AL&C Fund uses a similar approach for assessment of ECLs for cash and cash equivalents to those used for trade receivables.

(c) Liquidity risk

Ultimate responsibility for liquidity risk management rests with the management, which has built an appropriate liquidity Risk Management Framework for the management of the AL&C Fund’s short, medium and long-term funding and liquidity management requirements. The AL&C Fund manages liquidity risk by maintaining adequate reserves and by monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.

The maturity overview of financial instruments of the AL&C Fund is provided in Table B on page 46. Financial liabilities are not applicable.

Funding risk

Funding of the pipeline is currently not provided by means of debt financing, but can be retrieved by subscriptions from outstanding commitments. Outstanding commitments by shareholders are sufficient to cover the committed pipeline and therefore the short term. Exposure to funding risk is limited.