Our business model

We have a five-stage business model, which aims to create value for all our stakeholders.

 

The inputs to our business model

We use the following resources to create value for our stakeholders:

Physical assets

Residential care homes are central to our value-creation model

Relationships

We draw on our Investment Adviser’s strong relationships with operators, asset owners and other key stakeholders

Specialist knowledge

Our Investment Adviser’s deep understanding of the residential care home sector helps us to identify strong operators and attractive assets

Financial assets

We finance our business using shareholders’ equity and intend to incorporate a prudent level of debt

 

How we create value

 

We start by strengthening and developing our relationships with operators we want to work with for the long term. As our tenants will run our care homes for at least 20 years, we want to be certain they have a track record of providing good care, while running a sustainable and profitable business. Their capabilities will underpin a secure, well-covered rental stream for us. We also look to broaden our range of tenants over time, so we have a diversified portfolio.

We draw on our Investment Adviser’s existing strong relationships with operators and develop relationships with new operators, by clearly communicating what we are looking for in a tenant. The Investment Adviser’s deep knowledge of how to run care homes is a critical advantage in assessing potential operators.

Once we have identified the right operators, we look to acquire assets our existing or proposed operators would run well. We jointly review their existing portfolios or identify assets owned by third parties, where the operator could create value with us.

The Investment Advisers’ relationships with vendors mean we can buy some assets off-market, at attractive purchase prices. We can also move quickly, using the Investment Advisers’ knowledge to carefully and swiftly assess the quality of a potential opportunity through our selection process and procedures.

We typically look for portfolios of homes which have a record of operating well and where we can add value through asset management. In portfolios we will seek a combination of assets which offer solid performance, assets with potential for value creation and possibly some non-core assets which we will sell. While our preference is to acquire portfolios, we may buy single assets either to add to an existing tenant portfolio or with a strategy to acquire more assets with the new tenant.

We look to have a portfolio that is diversified by location across the UK, focusing on areas where there is a good balance of supply and demand for care and assets are available at attractive valuations.

Before we purchase assets, we perform thorough due diligence.

This combines an in-depth assessment of the operator and its quality of care, as well as ensuring that the assets are sound, that they align with our investment objectives and that there is sufficient demand for care in the area.

We will fund asset purchases through equity and a prudent level of debt, recognising that appropriate gearing can help to drive returns. Our policy is to sign leases of at least 20 years with tenants, with upwards-only inflation-linked rental growth (see investment objectives on pages 18-19 for more details).

The security of our rental streams depends on our tenants continuing to provide high-quality care, so they remain in demand and sustain their profits. The Investment Adviser therefore reviews CQC ratings and the outcomes of inspections, as well as visiting assets. Our tenants also report to the Investment Adviser on a quarterly basis, to ensure they are complying with their covenants. Our Investment Adviser’s sector knowledge helps it to engage with tenants and support their operations. The leases specify the minimum amounts tenants must spend on repairs and maintenance, so we can be confident our buildings are being kept in good condition.

We work with tenants to identify asset management opportunities that create value for them and for us. Examples could include adding beds, improving facilities or enhancing communal space. These projects increase revenue for the tenant, further strengthen their rental cover and grow rental income and capital values for us.

We continue to review the portfolio on an ongoing basis, to ensure it remains effective and efficient for us and our operators. If we believe it is value enhancing for shareholders, we may agree with the operator to sell an asset, so we can reinvest the proceeds in opportunities to create more value.

How we generate profit and cash

Our leases provide highly predictable and growing revenue streams. We look to control rigorously costs and exploit economies of scale as the portfolio grows, as many of our costs are fixed and some variable costs step down as our asset value rises. As a REIT, we are not subject to corporation tax on our qualifying property rental business, maximising our ability to distribute profits to shareholders as dividends.

Well-capitalised REIT should benefit all stakeholders

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