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EXCLUSIVE: Impact Healthcare REIT shares long-term investment model

Andrew Cowley

With a healthcare portfolio valued at almost £311m and tenants including some of the UK’s leading care providers, Impact Healthcare REIT is one of the UK’s major specialist investors and landlords in the sector. CHP spoke with Managing Partner Andrew Cowley to find out more.

Andrew co-founded Impact Healthcare REIT with fellow Managing Partner Mahesh Patel in 2017.

Over the last two years, the managing partners have grown their portfolio to more than 80 properties with a value of almost £311m.

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The portfolio is let on 20 to 25 year leases with 100% on inflation linked annual rent reviews with a 2% floor and 4% cap.

“The cap of 4% is in place just in case inflation does something really surprising,” Andrew explained.

“If it was going up by 5-10% per annum we think that could put too much pressure on tenants.

“We don’t have open market rent reviews. If you look at the bad old days of Southern Cross leases, they had everything – they had inflation adjustments, open market rent reviews and ratchets if rent cover went above X, they could increase the rent.

“We think our tenants have got good track records of increasing their revenues in line with inflation so if they’re giving us rents on that level – that’s fair and sustainable but anything above that could be too much. We want to make sure our tenants provide good quality care and are making money with the rent cover remaining at a good sustainable level.”

Given the growing spotlight on the private equity investment model of the UK’s largest care home providers, which has intensified with Four Seasons’ problems this year, Andrew highlighted Impact’s long term investment model.

“We are in it for the long haul,” Andrew stressed. “We are a long term landlord. We are not a trader of assets. We are not buying and then selling. We remain an investor for the very long term and are deliberately only using very conservative amounts of debt.”

The investor is painstaking in ensuring it strikes up partnerships with the right operators through rigorous due diligence.

“Our starting point is can we find tenants who know what they are doing and know how to provide good levels of care and who know how to make money while they are doing that and have they done that pretty consistently in the past?” Andrew said.

“We spend a lot of time talking to tenants and doing due diligence but also going around the homes and spending time with them. You learn a lot by walking around care homes with a tenant about how they think and how they operate.”

Belmont House

Impact’s investment model is also focused on selectively extending and refurbishing existing care homes.

“We have specifically ruled out doing greenfield development,” Andrew explained.

“What we like doing is if a tenant comes to us and says we have four homes – they are all trading well, they are all well established and, together, we have the potential to add 12 or 15 new/refurbished beds that we can fill.

“We think it’s a win win win. From the resident’s point of view, they have 15 brand new, high spec beds to choose from. It’s good for the tenant because they have more rooms from which they can make more money and their rent cover will be higher. From our point of view, we have an enhanced asset and more rent with a likely corresponding increase in the valuation of the home after we make the investment.”

Recent projects include the addition of two dementia units at care homes in Witney and Leicestershire.

“The starting point for us is if the tenant has a track record of providing good quality care and consistent operating margins then by definition the homes have to be fit for purpose,” Andrew noted.

“There are some markets, particularly private pay in the south, where you have to offer private bathrooms, but we are not obsessed with en-suite bathrooms. There are some client groups where they look great in the brochure but the client group is not going to be able to use them. If it hasn’t got enough bathrooms, we look at how we can add them, which may mean adding en-suites.”

In terms of home size, Andrew said the “sweet spot” was 40-75 beds.

“Once you get much bigger than that you can get a very institutional feel,” he added. “Below 30, we start asking hard questions why.”

While noting the REIT’s slight bias in favour of nursing over residential care, Andrew said it was up to tenants to decide their type of care.

“We leave that to our tenants to decide where they think they can do the best job and how their local market works and what’s needed,” Andrew observed.

“The one thing that makes us very nervous is tenants who are struggling for occupancy providing residential service taking on nursing clients but charging residential fees. If you see that it can tell you that they are really struggling to fill beds.”

Occupancy across the REIT’s whole portfolio averages in the low 90%.

“We have one tenant at 100% occupancy but that isn’t always a good thing because they might be over-operating the home or undercharging,” Andrew noted.

Contrary to the prevailing trend, Impact has more homes in the north than the south where the REIT aims to grow more.

“It’s more about diversification,” he said. “We want to build a national portfolio that is well diversified. We haven’t put a marker on a map anywhere saying we don’t want to be here. To be properly diversified we need to be well spread across the country.”

Birchlands

Diversification is also a theme in Impact’s broad range of tenants who range from smaller specialised operators to big operators such as Maria Mallaband.

The resident mix also varies greatly from private pay focused Welford in the south west, to LA focused Prestige Group in the north east.

“The ambition is to build a national, very well diversified portfolio,” Andrew said.

“We expect the split to reflect national averages; so roughly 60% public-40% private.

“We are not anti-LA. The bottom line is people need good quality care and you shouldn’t run a segregated system.”

Andrew said Impact had had mixed experiences of working with local authorities.

“Our tenants have direct contact with the LAs,” he noted.

“There are places where they tell us that LAs are a pleasure to work with and are constructive and there is a sensible discussion about what the fees are. There are also a limited number of places where commissioners might end with a major problem with capacity because of their apparent antipathy towards private providers.”

While Andrew said Impact had inherited a mixture of homes in terms of CQC ratings, he said the REIT was “very careful” in prioritising and keeping on top of regulatory performance and that the portfolio “maintains an above national average CQC rating”.

“We have a great respect for the thoroughness of the CQC inspection process, but one issue with their ratings is that they could be anything up to two years out of date,” Andrew noted.

“It doesn’t tell you that much about what is going on today. The same tenant could have two homes operating to exactly the same standard but have two different CQC regional organisations looking at them and one could be Good and the other could be Requires Improvement due to delays in updating the rating.

“We are not looking for perfection from our tenants. We want to know that when they have had problems, they are completely transparent and open about it and they have got a good track record of dealing with them and fixing them, putting in place measures to make sure they don’t get repeated elsewhere.

“If a home gets downgraded, we would expect our tenant to tell us before it’s published and to explain what happened and what they are going to do about it.

“There’s no direct financial consequences as a result of it in terms of rent. It’s something we keep a very careful eye on.”

Looking ahead, Andrew said Impact was focused on growing in a “steady, disciplined way”.

“We announced a deal with our ninth tenant recently Optima Care with two homes in Suffolk,” Andrew noted.

“We have good visibility on who tenants 10 and 11 will be and are working hard on that. I expect in a year’s time we will have up to 15 tenants, depending on the acquisitions we make.”

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The author Lee Peart

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