Impact Healthcare on the virtue of staying small

Impact Healthcare has increased its rent roll by 23% as its portfolio value nears £500m. But while the care home-focused REIT is gaining ground, with rental income rising to £38m in 2021 from 2020’s £31m, it has no desire to grow too fast. “We could grow very easily. It’s easy to buy a care home, there are lots for sale,” managing partner Andrew Cowley (pictured) told EG. “But there are places you simply wouldn’t want one.” A lot of that comes down to the local authority, or an imbalance in the local demographic. “You could buy up care homes in Ascot, where everyone has million-pound houses. But then where would the staff come from?” Assessing each potential purchase in granular detail is essential for Cowley, but the most crucial component is the tenant. The REIT currently has 129 properties, which accounts for around 1.5% of the incredibly fragmented care home market. “We paused growth completely in 2020,” he said. “We put the brakes on pretty hard, and it takes time to get going again.” Prior to the pandemic it was adding an occupier – or partner, in Cowley’s terms – every quarter. After five years it has 13, only one of which is in the top ten operators in the sector. “What we look for in a partner is someone who is young and hungry,” he said, where Impact can make, well, an impact as a capital partner.” And while there are now signs of some consolidation in the market, after years of fragmentation, Cowley wonders if there isn’t a disadvantage of being too big in this sector. When it last looked at Four Seasons, which went into administration in 2019, the owner-operator had seven levels of management. “There were diseconomies of scale,” Cowley said. Details were missed and the company collapsed. For Cowley, that has provided a valuable lesson – to focus on successful partnerships, instead of reaching for more market share. Having said that, he sees that organic growth will continue to come through the success of Impact’s current model. He draws a comparison with Primary Health Properties, which was founded in 1995 and now has around 7% market share and a portfolio of 521 properties worth £2.8bn. “We would like to do the same in this sector,” he said. “Only maybe we can do it a bit quicker.” The REIT’s annual report, published today (29 March), showed property investments of £497m, including loans to operators of £37.5m, up from £419m the previous year. The portfolio was valued at £459m in December. Chairman Rupert Barclay said the robust results had not come by chance: “We have deliberately fostered our resilience by carefully selecting tenants, putting in place leases with robust rent cover and inflation linkages and maintaining a prudent balance sheet. “Our tenants have provided high-quality care during the pandemic, and in turn we have received 100% of the rent due. This has underpinned a fully covered dividend for 2021.” Of the total portfolio of 129 properties, 104 had rent reviews during the year, adding £700,000 to the contracted rent, representing an annualised 2.5% increase on a like-for-like basis. Impact said the upwards-only, index-linked rent reviews contained in its leases gave it a “good level of protection against the current inflationary environment”. Barclay added that the reducing level of state funding was not a cause for concern: “As we emerge from the pandemic, the long-term investment case for care homes is unchanged. Occupancy is expected to continue to recover while the support from government grant funding falls away. “Demographic trends and the rising incidence of specialist needs, such as dementia, will continue to drive demand for care, which will require many new beds, in suitable homes, to be added to the market. The government’s reforms will provide additional funding for the sector and contribute to its resilience.” The REIT has continued to build its portfolio. In February 2022, it bought two care homes in Northern Ireland for £11m. In March 2022, the group invested in two homes in Nottinghamshire, by way of an £11.1m loan to Welford, one of its existing tenants. Upon receipt of regulatory approvals, a put and call option for the group to acquire these homes becomes exercisable. “We have a strong pipeline of accretive acquisitions, which has the potential to add attractive new assets and further tenants to the portfolio,” Barclay said. “We are also exploring further asset management and development opportunities, with a view to enhancing shareholder returns. We therefore look forward to making further progress with our growth strategy during 2022 and for the long term.” To send feedback, e-mail piers.wehner@eg.co.uk or tweet @PiersWehner or @EGPropertyNews Photo © Impact Healthcare REIT