The UK residential care home sector remains highly attractive to a range of investors due to strong fundamental drivers and limited volatility. As such, the financial markets have developed a range of different financing options which allow care home owners to release capital for the extraction of value or to fund the future growth of the business.
Ground Rent
A concept more familiar to the residential property, hotel and leisure markets which has made its way into the healthcare sector is that of a ground rent.
In simple terms, this involves the care home owner selling the freehold element of their property to a specialist investor. In return, a long term leasehold agreement is put in place (generally 100+ years) with the care home operator, through which they will pay a ground rent to the investor.
This is a simple way of releasing capital from the business (either for extraction to the shareholders or to fund further homes) whilst maintaining control of the properties. It is often seen as more attractive than a traditional sale and leaseback given that ground rents are reasonable priced and represent a small outgoing for the care home operator, therefore providing lower risk of default.
Prominent investors in this sector include Alpha Real with further investors currently moving into the market.
REIT / Property sale & leaseback
Whilst the ability to undertake a sale & leaseback has always been available in some form, the entrance of Real Estate Investment Trusts (REITs) into the UK care home market has made this significantly easier to access.
Under such an arrangement, the care home owner will sell their properties to an external investor in return for consideration. A long term lease agreement (20+ years) is then put in place with the care home operator for the continued use of the properties.
REITs such as Impact Healthcare REIT and Target Healthcare REIT will consider a range of deals from larger single property acquisitions, to broader care home portfolios.
In general, new build and purpose built properties are favoured, with limited appetite for older or retrofitted properties.
These forms of transaction are an excellent way of releasing cash to the shareholders or to finance the acquisition of further homes. Where the care home operator is looking for a full exit from the business, there is an emerging market for the sale "operating companies" to larger operators who do not require freehold ownership.
Private Equity Investment
For operators of scale, there remains strong appetite in the private equity market to invest into the care sector. In particular, the specialist care and children's services markets are seen as attractive due to higher margins and returns.
Options include selling a minority stake in order to raise "growth capital" to fund the development or acquisition of further homes, or the sale of a majority stake/management buy-out in order to allow cash to be extracted.
A number of mid-market firms are investing into the sector including the BGF, August Equity, Livingbridge and Montreux Capital to name a few.
Whilst private equity options remain strong for operators of scale generating EBITDA in excess of £1m, there is limited capital in this form available for single site or smaller scale operators.
Company Sale
The obvious option to maximise value for shareholders is through a full sale of the company. There continues to be a range of potential acquirers across the full spectrum of care home providers.
These acquirers range from smaller scale regional operators, to large national providers (often backed by private equity) looking to aggressively grow their portfolio through numerous acquisitions.
Valuations within specialist/complex care and children's services are generally higher than elderly care due to the higher margins generated.