Q&A: A care home REIT that’s meeting its growth Target

It has been a promising year so far for Target Healthcare REIT. The group, founded in 2013, recently made two acquisitions - an 88-bed care home in Leicestershire and a development site in Birkdale - and it is planning to expand its presence further across the UK.

The company has done five fundraising rounds since it was set up, with the last, in May 2016, raising more than £100m. This allowed it to beef up its regional portfolio, which now comprises 47 assets with a value of £285m.

Property Week caught up with founder Kenneth MacKenzie to find out what Target Healthcare’s next moves will be.

What is Target Healthcare REIT’s basic strategy?

We launched Target Healthcare in March 2013 with the aim of getting a diversified portfolio of care homes with several different tenants so we would not have to rely on any single tenant or operator.

We also wanted our tenants to sign up to very long leases - up to 35 years in England and 25 years in Scotland - to turn the rental income into a dividend that will be fully covered when the funds are fully invested. We would do that with a low level of gearing so there’s no leverage risk in the portfolio. Here we are, four years on with 46 homes, and our plan is to continue to grow.

We’re not trying to outgrow ourselves; we’re trying to be repetitive and a bit boring, in a word: reliable. If people are investing in us, it’s because they are looking for a stable income and that’s very much our intent.

Are you looking to expand in or around London?

We’re flexible about where we buy across the country. We haven’t bought in London but we’ve bid for things there and it’s another opportunity that we’ve been wondering about.

Why such a strong regional focus?

We see buying a care home as buying a local opportunity within its local market. We don’t say to ourselves: “We would like to have a home in Southampton - let’s see what we can find.” What we do is try to be a long-term support for investors in the care sector as opportunity commands.

We would always consider opportunities in light of local competition, supply and demand. That’s partly down to the number of older people in the area compared with the total number of beds, but it’s also crucial to find the right assets in the right locations.

What type of care home are you interested in?

There are around 480,000 beds in the senior living sector in the UK. About 150,000 to 160,000 are old-fashioned Victorian houses, flat-roof extensions, old bed and breakfasts and so on. They’re poorly equipped so we don’t buy any of them.

Then there are 250,000 units that are quite often purpose-built but their wetroom facilities are non-existent. They’re basically a block of rooms with a bare WC and a handwash basin for each room. We don’t really think that’s the future of care homes.

Our homes have wetroom facilities with each bedroom.

In one of your sites there’s a coffee shop, a cinema room and a gym. It doesn’t sound like a care home.

That’s the kind of product we’re looking to buy. Sometimes it might be described as high-end but we’re all used to ensuite bedrooms today. So why wouldn’t you be able to have the dignity of your own personal care in your own ensuite room? It’s the future of the sector.

How challenging is the regulation of the market?

We think it should be more challenging because we want to see improving standards of care. For the market to grow, it has to. We’re supportive of the regulator [the Care Quality Commission].

We are an unusual landlord. We describe ourselves as an engaged landlord - we are not just a rent collector. Our healthcare team is as big as, and sometimes bigger than, the investment team and they’re in regular contact with each home.

We are much closer to our tenants and our idea for this business is to provide best-in-class local market real estate so the staff feel good about where they work.

It’s always about the local market and the location of the care home. That’s really the big focus for us because you don’t want your granny to live 45 miles away from you.

Many expect the sector to be affected by the new living wage legislation. What do you think?

We have to ask: how is this stuff paid for? Older people are sitting on huge wealth; they all have their houses and the average net worth per person is around £100,000. But for every £100 a care home receives in income, about £50 to £55 is spent in wages and another £12 to £14 is spent in overheads, regulator fees, food, electricity and heating.

So, typically, care homes remain a profitable business. They make 30% to 35% EBITDA, sometimes 40%. It’s pretty simple to work out - a 10% increase in the living wage means a 5% increase in cost for the home and that has to be recovered through higher fees.

What are the main opportunities for the sector?

We’re at a very interesting stage of the cycle. People have been speaking for years about the demographic bulge and that is now happening. There is more demand - the number of over-85s has doubled in the past 20 years - and one in seven of them generally end up in a care home. We are at that stage of the market when there are more people looking for homes.

And the main challenges?

We also live in a time when the government is in permanent deficit. There are cutbacks, there’s hesitation about what local authorities are willing to pay and the private sector has to pay more. There are significant operational challenges in running care homes and we like local assets closely controlled by families and smaller operators - people who are really hands-on and engaged.

I also expect to see more regulation, which will probably force some companies to leave the market, and we’ll see increasing demand for bed spaces as the demographic changes and local authorities continue to try and hold back placements because of financial restraint.

I think the good operators will react to this strategically while poor operators will drift out of the market, which is what they’ve been doing for the past few years now.

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