Care Home Professional takes the temperature of the care home investment climate in conversation with Sameer Rizvi (pictured), managing partner of RD Capital Partners (RDCP), Derek Breingan, head of healthcare at Clydesdale Bank and Chris Wishart, director of healthcare at Savills.
CHP: How do you assess the current care home investment climate?
SR: Everyone is aware of the general risks facing the sector: the rising minimum wage, undersupply of nurses and growing stock of noncompliant care homes. At RDCP, we are cognisant of the risks, but are continually focused on the rewards. Our focus as a care home operator is to source good quality care homes that are performing very well financially, and as an investment firm, it is to rigorously practice value investing, ie we stay away from homes where we feel we would be overpaying on a multiple of EBITDA basis. To summarise, we view the care home investment climate as highly favourable. There is no time like the present to be actively buying into this sector in the UK.
DB: Let’s not pretend there are not headwinds out there but we definitely can see opportunities for the good established operators who are keen to create new care homes for the market. We spend a lot of time understanding their strategies. Development funding is a key area where investment is needed because there are not enough beds across the country. There’s more beds being lost to the market than being created.
The National Living Wage is having an impact but I think providers have already factored that in over the coming year. Having sustainable fees is the main challenge providers are facing. There is a challenge in having affordable care that is appropriate in quality and having someone to fund it. We are supporting a group in the north of England who have a very good relationship with their NHS Trust and CCG. We have helped them invest because the Trust and CCG have a willingness to utilise the private sector to meet the demand they have. We expect an increasing amount of this kind of integration between health and social care providers.
CW: From an investor perspective there is a huge amount of appetite. A lot of the investors are attracted to the sector because of how leases are structured with annual RPI linked uplifts and long leases compared to other property assets. There’s strong demand for the sector from a number of our clients.
We have seen a slowdown in US REIT activity. They were particularly active in 2014 in buying up some of the major groups. The slowdown is in part this due to the paucity of available targets.
CHP: What are the advantages of investing in care homes as opposed to other asset classes?
SR: It is really quite simple. Any fixed-income investment (bonds, money market, etc) yields peanuts. A real estate investment is relatively secure, but again the net investment yield is typically in the single digits. The reason we like healthcare (ie care homes) in particular is because they generate an extensive amount of cash, of which only a very small portion needs to be reinvested into the business. The executives in the healthcare industry do not demand obscene compensations, thereby creating a further fair market. The demographic rationale, as well all know, is also present due to the ageing population in the UK and other developed nations. The average deal size can be as small as a few million sterling, making it highly accessible for small investment firms. Lastly, the investment returns are stellar. Assuming you do not overpay, our average deals generate at least a 30% return on investment (ROI).
|RD Capital care home investments|
|Kings Bromley Care Home||Purpose-built, 55-bed nursing home in Burton-on-Trent offering dementia, palliative and respite care with consistently maintained ‘good’ rating and 60 staff members. Annual revenue: £1.9m; EBITDA: £600,000|
|Care home in Bath (live deal)||Purpose-built, 36-bed nursing home providing nursing and residential care for older people. Expansion plans include palliative care. Annual revenue: £1.3m; EBITDA: £300,000|
|Care home in Birmingham (live deal)||Purpose-built, 31-bed nursing home providing nursing and dementia care for older people. Annual revenue: £1.5m; EBITDA: £380,000|
CHP: What makes an attractive care home investment?
SR: I typically know within the first two to three minutes of being introduced to an investment opportunity whether or not I am interested in investing in the care home asset. We look for a couple of things: minimum 30 beds; purpose built (whether it be originally or newly purpose built); high average weekly fees; high EBITDA margin (ie 25% or more); appropriate price on a EV/EBITDA basis; well-established management team (the care home manager needs to have a stellar level of business acumen); ‘good’ CQC rating (we consider ‘requires improvement’ care homes, but only when they are ready to be re-rated by the CQC and are certain of a ‘good’ rating); and proximity to London (the care homes need to be within a comfortable three hour driving distance to our London head office).
DB: When looking to invest we first look at a providers track record and their experience in the industry. What is the experience of the manager and owners? Are they hands on? Are they absent? How much have they invested in that particular business over that time? What is the regulators view of how they provide care? We work closely with the CQC and Care Inspectorate to understand their focus.
Clearly if you have an ‘inadequate’ rating there must be something wrong but it’s important to understand why that is the case. It would be wrong to turn a blind eye where there has been an issue at that particular point in time and we look at consistency of rating over a period. If someone has been ‘good’ for a period over two or three years and then they have a drop there may be an understandable and supportable reason for that. ‘Requires improvement’ can be a whole number of things. The industry is adjusting to new parameters.
There is a perception that most of the investment is going to the affluent self funding parts of the country. We have been funding projects in the heartlands in Yorkshire and southern Scotland.
The developments vary from five star residential care to acute nursing, end of life, palliative care, much of which is delivered on an NHS, CCG, LA funded platform.
CW: Longevity is key to an attractive investment, that includes the quality of the asset itself plus the location and market in which the home operates. We have seen M&A activity with the likes of MHA acquiring Silk Healthcare and HC-One buying the Helen McArdle Group, both groups comprising high quality purpose built assets which have been able to command higher average fees due to their high standards of accommodation and catchment. Many operators are looking for good quality bolt-on acquisitions which compliment their existing portfolio and we are seeing greater activity within the medium sized groups. Mid-cap groups give investors a good return and we will see increased attraction to that market as investors seek good returns by backing strong management teams. We will unfortunately see the smaller homes continue to close. Hopefully other retirement housing models will fill some of this shortfall.