Nursing Home Properties is poised to securitise £100m of assets in a property sector that is expanding rapidly. Rachel Frampton reports.
The demographics make alarming reading. As the UK population ages, the number of people over 85 will grow 15% from 1994 to 2005, and by a staggering 80% over the following 30 years. Nursing and residential home demand is therefore set to grow dramatically to cope with those elderly people who are no longer able to live independently.
It is a trend that has already been spotted by property companies in the US, where 10% of the $92bn Real Estate Investment Trust market specialises in residential care facilities. Two of the largest healthcare REITs, Meditrust and Omega, are backing specialist investment companies in Britain, bringing with them sophisticated finance techniques.
Next week, Nursing Home Properties, of which Meditrust owns 20%, will launch the first securitisation of nursing home properties in the UK, raising some £100m to refinance existing borrowings and expand the portfolio. Major UK institutions and pension funds are expected to invest in the issue.
Since it was founded two years ago, Nursing Home Properties has built up a portfolio of 57 nursing and residential homes, valued by Grimleys at £105m. The properties have been acquired through sale-and-leaseback transactions with private-sector operators; the 3,237 beds in the NHP portfolio are operated by 11 different companies of which the largest is the US-backed Exceler Health Care Group.
NHP, which is quoted on the Alternative Investment Market, will securitise the income stream from the 25- to 30-year leases via the issuing of a series of fixed-rate notes. The notes, rated by Duff & Phelps at AAA, A, and BBB, will pay interest at the same rate as Treasury 8% 2021 government bonds, plus an average margin of 0.8%. The issue, underwritten by NatWest Markets, involves a complex global structure: the issuing company, Care Homes No 1, is incorporated in the Cayman Islands, with all its issued share capital owned by a Cayman Islands trustee company under the terms of a charitable trust; the notes will be listed on the Luxembourg stock exchange.
Operator funding
Despite the outward complexities of the securitisation, the fundamentals remain simple. According to healthcare industry analyst Laing & Buisson, demand for nursing home accommodation is generating the need for up to £450m of capital expenditure every year, at least for the next five years. Property is by far the largest element of that, and NHP believes the willingness of operators to fund their expansion through sale-and-leasebacks means that there is a potential investment market of at least £150m pa.
Since the first sale-and-leaseback deals were carried out in 1995, more than £200m of UK residential home property has been acquired by investors, at yields of 10% to 11%. So far, only five players have entered the market: NHP; Principal Healthcare Finance, which is backed by the US REIT Omega; Abbey Life Assurance; British Aerospace Pension Fund; and a Middle Eastern fund. Most of the major institutions are thought to be studying the sector.
But the sale-and-leaseback structure suffered a potential setback last month when the purchase by Nursing Home Properties of two homes from Associated Nursing Services came under the scrutiny of the Financial Reporting Review Panel. It decided that the details of the sale and leaseback agreement meant that the liability should stay on the balance sheet of ANS because the operator retained many of the risks associated with ownership.
Workable arrangements
While the panel ruling does not invalidate the arrangement, its interpretation of the accounting regulations could in the future affect lease terms where the operator is a quoted company. In particular, the panel questioned the use of turnover rents and clauses in the lease which enabled ANS to buy back the property.
Such details are important, however, as they underpin a workable arrangement. As Nick Dhandsa, chief executive of ANS, points out: “The big issue for us is that we are a capital-intensive business and we are trying to be operators rather than property owners. It’s a new market-place, where it is difficult to establish open market rents; we were setting out with NHP to work out a basis on which it can be made to work.”
For now, ANS plans to avoid such lease terms, but players in the healthcare sector are expected to lobby the Financial Reporting Review Panel to point out that such transactions are not, either in substance or in form, a creative accounting device designed to disguise off-balance sheet commitments.
“If we just used it [sale-and-leaseback] to bolster profit or give a false impression, then we could understand it, but we are not – it is being used as a genuine way of expanding our business,” says Dhandsa.
Principal Healthcare Finance hopes that its tenants will avoid similar difficulties because its leases do not contain turnover rents; instead, rents rise annually in line with inflation. PHF is the second largest provider of sale-and-leaseback finance, after NHP. Its portfolio of 42 homes has a total investment value of £75m, and includes 2,315 beds.
PHF has ambitious plans to expand its portfolio and seek a stock market listing, according to Graham Elliott, director of operations at Omega (UK), which is one of PHF’s principal shareholders. PHF leases are modelled on US leases: 30 years, with a break option at the 12th year. Its largest tenant is Exceler.
Elliott believes that the nursing home sector is not, primarily, a property investment. “We don’t see ourselves as property investors in the conventional sense; we are capital providers.”
PHF also brings its own healthcare expertise into play. “We’re looking to assist operators to grow,” he says.
The opportunities to realise any increase in capital values will be limited, since PHF does not intend to trade any of its investments. “In this sense, too, we would differentiate ourselves from a property company,” stresses Elliott.
Nevertheless, Grimleys’ valuation expert, Andrew Sidwell, does expect yields on nursing homes to fall as the operators establish the strength of their covenant. “Valuers remain very cautious because there has yet to be any transactions where these investments change hands. But, when a market has been proven, I think yields will gradually fall over a period of time as operators’ track records lengthen.”
| Investor | Portfolio value (£m) | No. of properties |
|---|---|---|
| Nursing Home Properties | 105 | 57 |
| Principal Healthcare Finance | 75 | 42 |
| Abbey Life Assurance | 28 | 8 |
| British Aerospace Pension Fund | 4 | 1 |
| Forthcoming conferences Wednesday March 12 Long-term care Grosvenor Hotel, W1 Organiser Laing & Buisson (0171 284 1268; fax 0171 267 8269) Wednesday March 19 |
