Our business model

Our business model is designed to achieve our purpose, which is to form long-term partnerships with our tenants, through which we own and invest in the buildings they require in return for a predictable rent, enabling our tenants to concentrate on providing excellent care to their residents.

To implement our business model, we have a clear, five-stage process:

Our tenants will run our homes for at least 20 years, so we want to be certain they provide good care, while running a sustainable and profitable business that generates a secure, well-covered rental stream for us. We look for tenants with a strong balance sheet, preferably with little or no debt, who have experience of improving homes, and who are ambitious to grow their businesses, through our acquiring more homes they will manage and through asset management opportunities. We draw on our Investment Manager’s strong existing relationships with operators and develop relationships with new operators. The Investment Manager’s deep knowledge of how to run care homes is a critical advantage in assessing potential operators.

We look to acquire homes our existing or proposed operators would run well, by jointly reviewing their existing portfolios or identifying homes owned by third parties, where the operator could create value with us.

As there are relatively few potential buyers of portfolios, acquiring a portfolio can help us achieve a better value. However, we may buy single homes to add to an existing tenant portfolio or with a strategy to acquire more homes with the new tenant.

The Investment Manager’s vendor relationships mean we can buy some homes off-market. We can also move quickly, using the Investment Manager’s knowledge to carefully and swiftly assess the quality of a potential opportunity through our selection process and procedures.

We perform thorough due diligence, combining an in-depth assessment of the operator and its quality of care, as well as ensuring that the homes are sound, that they align with our investment objectives and that there is sufficient demand for care in the area. Where we are proposing to acquire assets operating below their potential, we identify the measures required to enable them to operate at their full potential.

We 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 individual leases of at least 20 years with our tenants, with upwards-only inflation-linked rental growth.

We ensure we have a detailed knowledge of our tenants’ operations, helping us to work with them to identify asset management opportunities that create value for them and for us. Examples could include adding beds, improving facilities or enhancing communal space, to reposition the home in its local market. These projects increase revenue for the tenant, further strengthen their rental cover and grow rental income and capital values for us.

Our leases require our tenants to repair and maintain our buildings and our Investment Manager is diligent in ensuring compliance with this obligation.

We regularly review the portfolio, 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 a home, so we can reinvest the proceeds in opportunities to create more value.

The outputs from our business model

Effectively implementing our business model ensures we maintain a high-quality business that delivers sustainable value to our shareholders and wider stakeholders. This quality is underpinned by three pillars that we use to monitor performance:

The quality of the buildings we own

We own a diversified portfolio, a significant majority of which are good-quality, upper-middle-market care homes, which provide a welcoming physical environment for their residents.

We classify the majority of our buildings as core, meaning they will be viable for at least the lease term, have a suitable design for the target client group and are in good condition. Most of the remainder of our portfolio is classified as value-add, meaning it has the potential, working in partnership with our tenants, to change the fabric of the buildings and reposition them in their local markets.

The quality of care our tenants provide

The security of our rental streams depends on our tenants providing good-quality care to their residents, so the homes remain in demand and sustain their profits. Our Investment Manager’s sector knowledge helps it to engage effectively with tenants. The Investment Manager reviews CQC or relevant regulator ratings and the outcomes of inspections, visits homes and receives quarterly reports from tenants, to ensure they are maintaining their quality of care and complying with their covenants.

The quality of the cash flows we generate

Strong operators providing good care in suitable buildings generate secure and growing rental income streams for us. Our leases provide highly predictable revenue, with rental payments typically received quarterly in advance.

We carefully monitor our tenants’ financial performance, paying particular attention to their ability to grow their revenues in line with or ahead of inflation, to maintain a stable EBITDA margin and hence maintain or grow our rent cover.

A disciplined approach to capital allocation has led to high net initial yields on acquisitions and a conservative approach to using debt maximises cash available for distribution to shareholders.

We also look to control our own costs rigorously 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.