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Care home fund targets 7% yield with flurry of deals

Target Healthcare Reit snaps up three care homes and invests two thirds of the £31 million it recently raised from shareholders.

Care home fund targets 7% yield with flurry of deals

Target Healthcare Reit (THRL ), the country’s only listed care home fund, has invested nearly two thirds of the £31 million it raised from shareholders in November.

Since before Christmas the £155 million real estate investment trust has bought three care homes for just over £20 million, taking its portfolio to 34.

The latest deal came this week after it exchanged contracts on the £2.3 million purchase of a 12-bed specialist care home in St Albans. Last week it spent £14 million on another care home in the south-east of England and on Christmas Eve it acquired a 69-bed home in Sheffield for £3.9 million, including refurbishment costs.

The flurry of deals all involve properties with rooms that have full en-suite bathrooms with showers or, in the case of the Sheffield home, will be brought up to that standard.

Kenneth MacKenzie, managing partner of Target Advisers, the trust’s investment manager, said only 20% of care home rooms in the UK had genuine en suite ‘wetroom’ facilities with a shower as opposed to just a toilet and a wash basin.

He said it was important for Target to build a portfolio of good quality, modern homes as ultimately they were worth more and would boost the trust’s net asset value and generate better rents.

All three acquisitions will be leased back to operators on long-term leases of between 30 and 50 years, subject to inflation-linked rent rises, and starting with net initial yields of just over 7%.

Commercial property leases were typically much shorter at around seven years, said MacKenzie.

After ongoing costs the portfolio supports a quarterly dividend, which, although currently uncovered by earnings, yields 5.6% at the current share price of nearly 109p.

Since its launch in February 2013 Target has provided a total return to shareholders of 22.7%, ahead of the MSCI ACWI/Real Estate index return of 3.4% in sterling.

Care homes in the UK have a poor reputation and the sector has not been helped by the collapse of Southern Cross and problems at Four Seasons, another large operator with national ambitions.

MacKenzie said Target worked only with regional operators that had local knowledge and complied with its code of standards.

‘The challenge in the past was that landlords were just rent collectors,’ said MacKenzie. ‘It’s fundamental. We’re an engaged landlord. We need to be in the operator’s business,’ he added, explaining that Target regularly inspects its homes.

MacKenzie said the sector faced two challenges. First was the introduction of the new national living wage of £7.20, which replaces the minimum wage of £6.70. He said this would ultimately be passed on as higher bills for residents.

Second was the postponement until 2020 on the proposed £72,000 cap on care home costs for the over-65s and younger people with disabilities. Although this would hinder public confidence, MacKenzie said it would not prevent the market from growing.

According to healthcare analysts at Laing & Buisson, an extra 12,000 care home places are needed every year to keep pace with the numbers of people reaching 85 and over, which MacKenzie said was the point when the elderly and their families typically needed support.

While there are currently 480,000 care home beds in the UK, he reiterated that nearly 80% were in ageing, unattractive properties with 7,000 beds leaving the market each year. Laing & Buisson forecasts suggest that the sub-sector of modern, purpose-built homes will grow from 100,000 beds in 2015 to 160,000 by 2020.

MacKenzie said he would continue to look for new acquisitions. Enlarging the portfolio would help to reduce costs as a proportion of assets and would enable Target to cover its dividends with earnings.

Although Target is the only investment trust of its kind, insurance companies like Legal & General were active in the market, he said, looking to exploit the long-term revenues they could generate for their pension funds.

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