Impact Healthcare REIT plc is a real estate investment trust. Our ordinary shares were admitted to trading on the Specialist Fund Segment of the Main Market of the London Stock Exchange on 7 March 2017.
Our investment policy is to acquire, renovate, extend and redevelop high-quality healthcare real estate assets in the UK, and to lease those assets, under full repairing and insuring leases, primarily to operators providing residential healthcare services.
Our primary focus is on the residential care home market.
Five drivers influence the demand for, and provision of, care for the elderly, making it a potentially attractive market for well-capitalised asset owners and well-managed operators. In particular:
People are living longer.The number of people more than 85 years old in the UK is forecast to increase from 1.6 million in 2016 to 3.6 million by 2036. This age group is in particular need of residential care, with 15.7% either in a care home or long-stay hospital bed.
Supply has shrunk. The number of beds available has fallen, from 574,000 in 1996 to 460,000 in 2016 – a decline of 20%. More than 2,400 care homes shut in the five years to December 2015.
The market is highly fragmented, with 69% of the market held by operators with fewer than 15 homes. The Group now owns 0.6% of the of the private care beds in the market. This offers scope for stronger asset owners and operators to grow through consolidation, and for asset owners to broaden the range of tenants in their portfolios.
There is severe pressure on the NHS. In the 12 months to June 2017, the NHS in England lost cumulatively 2,274,300 bed days through delayed transfers, an increase of 66% on 2010. 25% of the patients occupying these beds were waiting for a bed to become available in a care home. The average hospital bed costs four times more than the average care home bed.
Government funding is increasing. In response to these pressures, there is recognition across the political spectrum that adult social care needs more funding. The government announced a series of initiatives during the past two years. These were:
- a social care precept, allowing councils to increase council tax by 2% each year from 2016/17 to 2019/20. This was subsequently raised to 3% for 2017/18 and 2018/19, with the potential to raise £2 billion more a year by 2019/20;
- an improved Better Care Fund, providing an additional £4.4 billion between 2017/18 and 2019/20; and
- a new Adult Social Care Support Grant, providing £240 million to councils in 2017/18.
While major structural changes to adult social care are unlikely in the short term, further increases in government funding can be expected, given the political imperative to do so.
One consequence of these pressures – increasing demand, shrinking supply, the need to reduce pressure on the NHS and increased government funding – has been above-inflation fee increases. According to research by Christie & Co, national average fee increases for elderly care in 2017 (compared to 2016) were 6.3% in the private market and 5.2% in the local-authority-funded market.
At 30 June 2017, we owned 57 residential care homes with 2,527 beds. The properties are all standing assets with a track record of successful operation, and are diversified by geography, customer base and home size.
Our acquisition of the seed portfolio completed on 4 May 2017, for a total consideration of £148.75 million and at a net initial yield of 7.6%. All outstanding debt facilities were repaid in full and we acquired the seed portfolio debt free.
On 29 June 2017, we acquired Saffron Court for £3.4 million, at a net initial yield of 7.7%. Saffron Court has 48 beds. The terms of the lease are substantially the same as for the seed portfolio.
Established initial tenants
Our initial tenants – Minster Care and Croftwood Care (both part of the Minster Group) – are established providers, offering quality of care that exceeds the national average. Both are free of third-party debt and earn fees from more than 80 public sector customers and in excess of 700 private residents between them.
The Minster Group acquired its first care home in December 2004 and the Croftwood Group acquired its first care home in 2009. Both Groups are overseen by Mahesh Patel and a management team with an average tenure of 18 years.
Long-term, inflation-linked income
At 30 June 2017, the portfolio had a weighted average unexpired lease term of 19.85 years, with no tenant break rights and the option for two 10-year extensions. Annual rental uplifts are based on the Retail Prices Index, with a floor of 2% and a cap of 4% per annum. The majority of the assets are owned freehold, with six on 999-year leases.
For the 12 months following admission, we are targeting a fully covered aggregate dividend of 6.0p per share, equating to a yield of 6% on the 100p issue price, on an ungeared basis. For the period from admission to our year end on 31 December 2017, our target dividend is therefore 4.5p per share. Dividends will be paid in quarterly instalments.
Our dividend target is not a profit forecast. There can be no assurance that we will meet the target and it should not be taken as an indicator of our expected or actual results.
Potential for NAV growth from active asset management
We aim to deliver NAV growth through active asset management.
Since 30 June 2017, the board has approved in principle, subject to financing, the first phase of our asset management programme. This will see 92 beds added across three homes, which currently have 144 beds between them. The total cost is expected to be £7.9 million, with the projects targeted for completion between January 2018 and January 2019. The extra rooms are expected to increase rent on these three assets by £0.75 million or approximately 54%.
We have also identified opportunities to add a further 310 beds and are progressing our plans to do so. The programme is expected to take around three years to complete.
Potential to grow through acquisition
Our strategy is to identify new properties and tenants who will diversify our investment base and continue to deliver strong economies of scale, with efficient operations alongside a good quality of care. We look to identify investments that, under our ownership, will provide value for money to our tenants’ customers and residents, while delivering attractive and stable returns to our investors.