A low-risk way to beat inflation

Demand for care-home places is strong and the sector should be able to raise prices ahead of costs, says Max King.

The public thinks of care homes as synonymous with old people’s homes but, as Rupert Barclay, chairman of Impact Healthcare (LSE: IHR) explains, these can be divided into three categories: residential homes for the elderly, for those who are infirm and for those with dementia.

“People don’t put their relatives into homes because they are old but because they can no longer look after themselves or be looked after at home. If they are incontinent or immobile, they need care... it takes two people to lift someone out of bed into a chair or wheelchair,” says Barclay.

This means Britain’s ageing population is not necessarily a driver of increasing demand for care-home places. People live at home for longer, even if home involves stairs – doctors regard exercise as essential. Alternatively, they move into assisted-living properties with on-call help. With medical care for dementia and infirmity improving, there is no guarantee of long-term growth in demand.

Two firms funding care

At present there is a shortage of places in care homes, which are nearly at capacity. These have specialised facilities and equipment and high staffing costs. Operators without access to necessary capital for ownership lease their properties and focus on the management.

Two listed companies provide operators with the capital: Impact Healthcare with 128 properties, 6,800 beds and £530m of property assets; and Target Healthcare (LSE: THRL) with 99 properties, 6,835 beds and nearly £900m of property assets. As this implies, Target’s homes are twice the size of Impact’s but there are other important differences.

Target has grown primarily through acquiring new properties, often direct from a contractor who has built to order. Impact doesn’t build many new homes and a high proportion of its residents are funded by local authorities, earning lower rates. Instead it acquires decent properties with over 20 years of life and attractive yields, which it seeks to supplement through incremental investment with a higher rate of return.

Both companies’ properties are spread across the country and the tenants are diversified. Target has 28 and Impact 14, avoiding tenants managing just a single unit. As landlords, they avoid operational risk but need to scrutinise their tenants lest they get into financial or operational trouble. Leases are long term but can be transferred between operators and rents are inflation protected. Both funds augment returns with a moderate level of debt, of around 10% of net assets.

Both trade at modest premiums to net asset value. These premiums are constrained by the obvious wish to issue more equity for acquisitions. Impact raised £40m earlier in the year and another £22m recently but, with a £300m pipeline of potential acquisitions, would like to raise more. Barclay admits that “we’ll have to let one or two projects go.” Target raised £125m last September. Both yield around 5.5% and dividends are expected to rise.

Keeping up with inflation

“The fundamental thesis for care is strong,” says Barclay, “while the operational and reputational risk for us is low.” Operators will be concerned about staff availability and their ability to pass on higher costs. However, average weekly fees have risen ahead of the retail price index for the last 25 years.

The need to provide care for the infirm has been recognised across the political spectrum. Last September, the government set out proposals including “a health and social care levy” to provide the required funding, a cap on care costs in England, less means-testing, and funding for improved infection control and testing. “Government reform provides greater certainty for long-term funding,” says Impact. This makes both Impact and Target appealing for those seeking an attractive, inflation-linked income with low risk.

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