Put the care back in care homes, urges Target Healthcare REIT boss

When Kenneth MacKenzie describes the kinds of facilities he wants offered in a care home owned by Target Healthcare REIT, it doesn’t sound like too much to ask: crucially, he says, each elderly resident should have access to an en suite wet room in which they can wash. So the chief executive of Target Fund Managers, which manages the investment trust, is disappointed that only about a quarter of care homes in the country offer that. The rest, he says, tend to have en suite bathrooms with only a toilet and hand basin. “When did you last stay in a hotel room where the en suite is a WC and a wash basin?” MacKenzie asks in an interview on a visit to London ahead of the REIT’s annual results. Never, I reply. “So why would you do that for an elderly resident? We believe the investor community should be choosing proactively to raise the quality and investing in that part of the home.” MacKenzie adds: “I think even the prison population now largely have the necessary facilities in their cells. What does that say about our care of the elderly?” I think even the prison population now largely have the necessary facilities in their cells. What does that say about our care of the elderly? – Kenneth MacKenzie, Target Fund Managers Putting residents first Since Target Healthcare REIT listed on the London Stock Exchange in 2013, MacKenzie and colleagues have been working to show that a better quality of care home can go hand-in-hand with a compelling investment opportunity. “Our purpose at an economic level is to pay a stable, long-term income to our investors with a little bit of capital growth,” MacKenzie says. “At a physical, real estate level, we have the highest regard first of all for the preciousness of life and for the residents who inhabit these places. We believe it’s honourable to care for people well into their old age and to death.” The REIT’s latest annual results, covering the year to 30 June and published on 17 September, showed profits up by about 8% year-on-year at almost £30m, and EPRA net asset value per share rising by 1.7% to 107.5p. The company’s 63-property portfolio is now valued at £500.9m, up by 30% on a year ago. Care homes have largely replaced the geriatric wards of hospitals, MacKenzie says, although he emphasises that Target Healthcare REIT does not want its homes to be viewed in such a way. Rather, the company is developing homes to include offerings such as cinemas, private lounges and private dining. “There has been a change in society in my lifetime where we would have tended to look after [the older] generation in our own homes and they would have died at home with us,” MacKenzie adds. “Because of societal changes, that generation is tending to have to be looked after in a more institutional setting.” On the hunt for best-in-class real estate According to analysis by agency Knight Frank, the number of new care homes being built is largely offset by the number being closed. Nonetheless, in a fragmented industry in terms of ownership, there is no shortage of acquisition targets, MacKenzie says. But the Target Healthcare REIT team is discerning about what and who it invests in. “We’re looking for excellent real estate in 10-minute drive times [for residents’ families], which have good supply and demand characteristics,” MacKenzie says. “Within that 10-minute drive time, will the physical home be best in class? We’re looking for the right real estate with the right public and private space, and bedrooms so that personal care can be done in your en suite wet room. “And then there is a commercial side. Is the ethos of the underlying operator one that we would support in terms of the leadership, in terms of the way that the business is run? Is there good availability of labour in that local market? And then the further economic decisions that you have to take are what are weekly fees in that area and what kind of occupancy can you reasonably expect to get and how does that all tie into the price of the real estate?” The REIT is now in the middle of a £50m equity raising to help finance new deals, having already raised £50m last November and increased its debt facilities by £40m to £170m. “We see banks probably a little less willing to lend to some of the operators, partly over structural reasons for the banks themselves, partly probably recognising the risk,” MacKenzie says. “We’re fortunate that we have a great stable of investors, many of whom have been with us for six and a half years and are highly supportive and reinvested every time we’ve come back to the market.” To send feedback, e-mail tim.burke@egi.co.uk or tweet @_tim_burke or @estatesgazette