Kenneth Mackenzie

CEO of Investment Manager (Target Fund Managers), Target Healthcare REIT Ord

QuotedData's Weekly News Show - Kenneth Mackenzie from Target Fund Managers

🎥 Jul 11, 2024 📺 QuotedData ⏱ 69m 👁 150 views

About Kenneth Mackenzie

Kenneth MacKenzie, chief executive of Target Fund Managers and Target Healthcare REIT, has continued to promote the fund’s focus on investing in modern, purpose-built care homes with wet rooms in every bedroom. In recent interviews, he stated that the fund’s portfolio has maintained rent cover of 1.9 times, ahead of its underwriting target of 1.6 times, and that nearly 80% of tenant income comes from private-pay residents. He described the fund’s strategy as providing “stable boring long-term income” and noted that over the past five years it has returned 50% to investors, including a consistent 6% annual dividend. MacKenzie has emphasized demographic tailwinds, saying the number of over-85s is expected to double in the next 20–25 years and that 13.4% of that group will require long-term residential care. He argued that being in the private-pay segment is a “long-term secure place” regardless of government policy, and that modern homes are better suited to attract staff. He also highlighted the fund’s physical inspection process, describing a team with “150 manlady years of experience” who visit homes multiple times a year to assess care quality.

Source: AI-verified profile updated from Kenneth Mackenzie's recent appearances. Browse all interviews →

Transcript (69 segments)

Operator0:04

Thanks if you just don't mind putting yourself on mute until then, that'd be cool. Sure, thank you.

Hi Kenneth, I'm just from the quoted data side. I've just about to go live. If you mind turning off your camera, and then when James goes back on, then you can turn it back on. Thank you.

James9:47

Okay, it's 11 o'clock, good morning everybody. We'll get going. So, I've got a bit of news to cover, then Rich's got some too, and then he's going to be interviewing our guest this week, who's Kathy McKenzie from Target Healthcare REIT. So, news first. It looks like a lot of funds but it is the same issue. I'll explain that in a second, and the discount, and then going to talk about Sirius. So, there's Chris, the CR chart for Chrysalis. Now you've seen this one before because we talked about it quite a few times, but it's a decent size and on quite a big discount, though that has been sort of narrowing very, very recently. SH Reach Opportunities is on here too. Not as bad a discount, but it's got space the same sorts of stocks. I think it's kind of interesting. Molon Ventures I've got there. That one is on about the same sort of thing as Chrysalis. All very similar things. So basically, all of these things are invested in growth capital companies. And then you got Edel Worldwide which is obviously invested in global small caps. Now the reason we're talking about all of these today is because they all hold Graphcore, which was an unlisted investment and it's just being bought by SoftBank. SoftBank are actually buying it with their own balance sheet, so it's not coming from division funds. And a lot of talk about what they're going to do with it, but the key to it really is that it makes graphics processing chips and it's a competitor really to Nvidia. But for whatever reason, although the company would say that their chips are better than Nvidia's, they haven't been embraced by customers and so the sales are negligible and they've been losing money. So SoftBank obviously owns Arm, so they're going to knock it together somehow, exchanging maybe not just mere companies but definitely sort of exchange for technology and stuff, I think, and then try and make that bigger thing. But that's besides the point because they've bought it for cash. We don't know exactly how much they've paid. The implication is then that kind of range of 600 to 700 million. That's a long way down from where it was valued at the peak, which was in 2020, already 2.5 billion dollars. For Chrysalis, they get about $55 million up front and then there's some deferred payments, and I think everybody's deal is structured the same way, so a little bit of deferred income here too potentially. That $54.8 million translates to 43.8 million, which is quite a decent premium to the value that they were carrying as at March 2024. So they were at 20 35.1 million, and so that adds about one and a half pence to the NAV. But unfortunately it means they've lost money on the investment overall because they've been quite a long-term investor in it. So that's really good news that they freed up money, but at the same time they've said, well we did put 10 and a half million euros into WeFox, so now they've got the 50 million that they wanted to have of liquidity in their cash reserve, and the idea was once they've got that, anything more they get, they're going to use to do buybacks and to try and bring their discount down. But because they put the money into WeFox, they can't start doing that yet. That's been pushed back until the next disposal. But I think the next disposal is likely to be much more material than Graphcore. So what it's going to be we don't know. It might be Clear, it might be Starling. There's a whole bunch of different things that they've got that are relatively mature and doing quite well, and they're going to be much bigger disposals than Graphcore, and then that's going to make the difference to the discount.

Theory post trade Bri opportunities. It's a much smaller deal, it's a much smaller fund. So they invested about 3 million quid in 2020, so that would have been more or less the peak valuation, but because the way that their deal was structured they put it into preference shares, they're going to get back the value of their original stake less expenses, so they haven't really lost money on it overall. And because they've written it down already, they're writing that up and that's going to add about 75p to their NAV. For Molon Ventures, they're freeing up $26 million. I think the interesting thing here is that where's the other two? It was quite a big uplift, they were already valuing it around this kind of level. They've been invested for a long time as well, so they have lost money as well. And again, they've said well we've made two other exits recently, so we were valuing these today again also fairly close to current valuations. That to me says that the Molon Ventures NAV is a lot less conservative, let's put it that way, than something like Chrysalis or Australia Opportunities NAV. We don't talk much about Molon Adventures, it's not in the Morningstar stats, we don't normally cover it. It's something we've been thinking we probably do, we might do something more on that in future, we'll see how we go. Lastly, End Worldwide, they haven't put an answer when I put the show together, it's not a very big holding for them. So it was only valued about 33.7 million at 30 April. I wouldn't be surprised if they're going to write that up as well, so there'll be a little uplift, but that's tiny in the grand scheme of things. So it's good to draw a line through this. It's been a disappointment the last couple of years, definitely. It's a great shame, could have been considered like a Great British company, but didn't work out. But anyway, freed up some money and try to move on. And then the only other one I want to talk about was Adican, a small-cap UK small-cap fund, 200 million market cap, trading around asset value and has been fairly sort of stable share price for a while now, and trading close for a while now too. So it has been able to issue some stock, but they've got demand from an investor. We don't know how big that investor is, but that investor wants to put some money into the company, and so they're going to do a placing of shares to professional investors to raise money in that way. And at the same time they're going to do a retail offer alongside it. So the new shares being issued are going to be a 1% premium to NAV. That announcement will be made on 17th of July what the price is going to be, so we don't know what that is yet. Part of the attraction I suppose is that there's no stamp duty, but you see it trading at a 0.9% premium, it's really not far off just buying shares in the market. That's the first thing. If you want to apply for stock in the retail offer, you have to do it through Winterflood's R platform, which is the thing that they set up to deal with private investors. The whole thing's being done under this EU rule that lets you issue stock to retail up to 8 million EUR. It's something that we inherited from the EU that we just rolled over into UK legislation when we left, and it's incredible to me that we haven't got round to revising this yet. It needs to be a much bigger number. The attraction is they don't have to issue a prospectus, that's why they want to do it this way. If they were more than 8 million EUR, they'd have to issue a prospectus and that cost an awful lot of money. But they can get around it doing this. I think that 8 million euros number needs to be a lot higher, but there we go. So the wrap offer closes at 2 PM on the 17th of July, so there isn't an awful lot of time to think about this. And I can see why it's trading at asset value, because these are all the UK small-cap funds ranked by five-year returns, and it ranks third. But actually I don't want, I really want the sector to grow. I do think this is great, I think this is great, this is happening. But you can buy the shares that's more or less the same price of the market anyway. And two, the recent performance of this fund has not been as good as it has been over five years. So over three years it's eighth out of about 23 funds, over one year I think it's 18th out of 24 funds. There are things that have done an awful lot better than it recently that are much, much cheaper. And if you want to buy UK small-cap, I'd suggest you look in this sort of area really rather than down here. That's my opinion, and up to you. So that's all I really wanted to say. I'm going to hand over to Richard now and let him drive.

Richard19:15

Presentation? Great, thanks James, let's get this going. Cool, okay, so yeah, just wanted to talk about Sirius Real Estate. So they've raised some money this week. So this is their chart. Big company, 1.3 billion, trading on a slight, oh, 5% premium, which is not that common amongst the real estate companies at the moment. So we'll go into why I think that is in a sec. But they do their job well and they're very good at it and they're very focused on what they do. So for those who don't know much about them, they own business parks and sort of light industrial estates predominantly in Germany, but in the last couple of years they've come into the UK market. And it's really a sort of value-add business model. So they buy high yields, sort of low vacancies and things like that, and they put a bit of capex in and fill up that space, and then either refinance that to release the money, or sell it at lower yields and then recycle that through. So since 2014, they've acquired 58 assets with just under 900 million. And then 10 years later that's worth almost 1.3 billion, 46% uplift. And in that time they sold 14 of their assets at a 67% uplift. So that's the business model, it's working really well. So 10 consecutive years of rental growth of 5% or more across the portfolio. That's led to 10 consecutive years of annual dividend growth, which was nicely covered by earnings. And their 10-year NAV total return and share price total return are really quite impressive over that period. And on the balance sheet as well, it's in quite a strong position. So that's why we feel they're trading at a decent premium. So this week they've announced and then raised 150 million at 94 pence per share, which is a slight discount on the closing price but in line with their NAV at the end of March. The retail offer also raised an extra 2.5 million, so they got as much as they wanted in both bits there. And those shares will be issued early next week. And this follows a raise that they did at the end of last year that got a similar amount, 147 million, and a bond issuance earlier this year for another 60 million euros. So investors seem to be happy with what they're doing, and they're taking advantage of that and growing. So they deployed the equity raise from November into 11 assets mainly in the UK, and they say they've got a near-term pipeline which they want to spend this money on: two assets in Germany and three in the UK, and then a medium-term pipeline of over 100 million euros. And yeah, again they'll do exactly what they've done before: under-rented properties with high vacancies, put some capex into it and grow the rents, and yeah, probably sell it in a few years' time. So that is them. Let's get on to our guest.

Our guest. Kenneth, hi Kenneth, how are you?

Kenneth Mackenzie22:53

Yeah, very well, thanks, and you?

Richard22:56

Yeah, very good. Yeah, well, thanks for joining us today. It'd be really interesting to hear about you guys and what you've been doing and how you see the sector going. So, there's a bit about you, but should we just crack straight into it? I'll give you sort of a few minutes on the slides and yeah, introduce the fund, and then we'll get into questions.

Kenneth Mackenzie23:17

Yeah, perfect, look forward to doing that with you. So investing in care: what we do is buy brand new care homes, and we've been doing this as a fund manager for over 15 years. This particular fund, the listed fund Target Healthcare REIT, was founded in 2013, so we've been at this now for just over about 10 or 11 years. At the end of March we had 98 care homes, about 6,500 beds, 60 million contracted rent. We're highly diversified in the source of that rent. The largest tenant only has 16 or 17% of the rent roll, and we have another 32 tenants giving ever smaller amounts than that. The rents are inflation-linked, so they go up linked to RPI year by year with collars and caps typically at 2% and 4%. We're a FTSE 250 business. As I've said just now, 33 different sources of income. The portfolio value around just under a billion, valued at 6.2% effectively, and we're a very long income fund. 26 years of income. And when we started out, we planned to be a long, steady income fund with great total returns and also the mission of providing better physical quality for our seniors, because there's going to be a lot of seniors in the years to come, and that's one of the really positive tailwinds we have. You'll see that from this slide here: the number of over 85s doubles in the next 20 to 25 years, and on average one in seven and a half of us, 13.4% of the over 85s will require long-term residential care. So it's a really positive story in terms of our expectations for long-term demand for what we do. And we love to invest in the sector because of the kind of worthy nature of what it all is.

Also within the sector, in terms of the quality of the real estate, it's important to speak about what kind of bedrooms are represented across the sector. When I started investing in the sector just over 15 years ago, about 9% of the bedrooms in the sector, and there are about 450,000 bedrooms in total, about 9% of them had wet rooms. When we launched Target Healthcare REIT, it had risen to about 50%, so 14% of the bedrooms had wet rooms. And last year that number had gone up to 32%. So there's a very clear market shift to care homes where the bedrooms have wet rooms. And in fact, you'll see that our portfolio, Target Healthcare REIT, is effectively 100% of the bedrooms have wet rooms. Why is that important? Well, the slightly indelicate answer is that if you're in a care home, the residents, about 70% of them are singly or doubly incontinent. There's actually a really good video on our fund manager website and on the REIT website which is an animation video of the need for wet rooms. And the issue is, do you want your toileting and cleaning up after toileting, if you're wearing a pad, done in the privacy of your own room, or do you want to be one of these poor folks who have to get that done in common bathrooms? You'll see that 68% of the beds in the sector are not compliant with best social practice, whereas this portfolio is in a remarkably better position. So that's part of the mission we're on: the mission of creating long-term income but also the mission of providing better quality places for our seniors. And the portfolio has also got a strong bias towards private pay. Significantly ahead of the listed peer group in the UK, you'll see that 71% of the underlying residents in the care homes pay privately for their accommodation, and that is very different compared to our listed peers where it's down at 28%. And part of the mission for us there and the purpose for us there is that, regardless of which government is in place, we don't think there will be endless amounts of government money to fund this. So we have long felt that being in the private pay place was the long-term secure place for us to be. So we're miles ahead of the listed competition for that.

A little bit of financial reporting for you. The net tangible assets per share rose in the first quarter of the year to 109p. The earnings per share rose just about 4%, and you'll see the dividend at the current share price is around about 7%, just over 7% yield, and 110% cover for the quarter. So financially we're in a good place with certainty of rental income growth. Rent collection robust, greater than 98%. And I'll speak a little bit about the conservative balance sheet. We actually sold some more assets a week or two ago, so our net long-term debt is down to 22-23%. And it's got great weighting on it: 150 million of it is through to '32 and '36, and the balance of about 80 million is currently to November '25 with quite a number of banks and insurance companies keen to lend on to us. And the final comment to make in relation to this slide: when I started the fund 11 years ago, we set out to create this long income for our shareholders. And I remember somebody saying to me in the early days, 'Of course you really know if this works in about 10 years' time.' And a month or two ago we discovered that, in terms of the UK Healthcare Annual Property Index, the MSCI index which has about 8.5 billion of assets in it, we were the number one for the year and for the 10 years we are number two for total returns at a property level over the last 10 years. So we're thankful that the model has worked and what we do has worked in terms of providing long, stable returns.

So we wanted to speak a little bit about the portfolio itself, because the portfolio is obviously what creates the rental stream. We've spoken already about wet rooms compared to listed peers of 28%. In fact, we're almost at 100% of our bedrooms have wet rooms. In terms of environmental EPC ratings, 99% of the portfolio is A and B rated. A number of people have said to us that they doubt there's another portfolio in the UK with such good EPC ratings. And you'll see in terms of the age of the buildings, compared again to our own listed peers, that it is just vastly younger compared to product pre-1990 and many conversions. And part of that for us is the seniors need to be in safe places, the carers need really good places to provide the service to our seniors, and modern purpose-built is as well as being environmentally more friendly, it's also socially more advantageous for the residents and with great surroundings all around that.

And I spoke a bit about the MSCI Healthcare Index here. You are the index for the last 10 years, and you'll see that the dark blue line has beaten the index for every year over these last 10 years. So we're humbled and thankful for that, and obviously keen that we would be able to continue that stable path on into the future. Speaking a bit more about the portfolio, it's been interesting because care homes were very much in the press through the pandemic, and in fact what's quite interesting about the portfolio is that we're not yet back up to the occupancy level. And when I speak of occupancy, I mean here the percentage of the number of beds in each care home. Our homes as real estate are 100% occupied, but in terms of the residents within the care homes, pre-pandemic we were up about the 90% level, currently we're around 86-87% level. So you might think that was a little concerning. In fact, if you look on the other side of this page, you'll see where portfolio rent cover has got to, and we're at an all-time high rent cover for the portfolio, up at 1.9 times, which for a modern portfolio is pretty rather really good. And that of course follows through to great rent collection, and our underlying tenants are making good money, so they can look after people well and look after your buildings really well also.

Another observation to make in terms of the pandemic is that when we entered the pandemic, because we buy brand new homes, we were in the situation where only 70% of the portfolio was mature. Typically it takes up to three years for a care home to get to maturity. There's a reason why people, it's called dementia, the resident has some level of dementia, and you cannot just fill the home straight away with people who need a lot of personal care and tender loving attention. However, as we get into the first quarter of '24, we're around the 91-92% level of maturity, and that speaks well to the ongoing profitability of the homes and the maturity of the homes. And you'll see that I made reference at the beginning to how rent reviews are completed on an annual basis. Roughly 25 of the homes get uplifts in their rent levels on a quarterly basis, and you'll see that these rents have been rising by around about the 4% level quarter by quarter as each individual home goes through to have its rent review. And that's not a big discussion that we have, that happens quarter by quarter, so it's a very easy process for us.

So what's the outlook for the care home sector? We actually feel really positive about it all. The demographics are hugely in our favor, and because we have a premium portfolio with excellent private pay fee proportions, the profitability of the homes is robust. The other thing to remember in relation to care homes and to our homes in particular is that it is what we call needs-based care. In other words, it's not an optional purchase. The resident needs to be found a safe place as families go back to work post-pandemic. They need a safe place for their loved one, and there is further opportunity especially as the new government potentially addresses the NHS issues with delayed discharges, which will create further demand. Rent cover in our portfolio has increased even while inflation was increasing and now easing. Wage inflation and national minimum wage has obviously been important, but rent cover has improved through that because of good increases in the private pay fees, and energy costs have been well managed. Staffing is really important. For every £1 of income in a care home, typically 50 to 55p of that income is paid out to staff. And with the visa schemes that are in place, staffing is now much easier in our care homes. And I think that's partly also because we just have really good places to work. Staff would tend to choose a modern purpose-built home more than an old-fashioned one, and there's a better understanding of the career of caring post-pandemic, so much more stable employment. In terms of the real estate itself, it's been great for us who are on a mission to improve the quality of care for our seniors. It's been great to see the quality improving with wet rooms now up to about a third compared to 10 or 15% when we started. The older homes and beds are leaving, though they're probably not yet been replaced quickly enough. Staff as I say favor modern homes. It's a great ESG story, and we don't really have EPC capex to spend because of the great place our portfolio is in. And demand for places in the longer term, as well as demographics, dementia is a reality. There is also the challenge of loneliness with people living more and more on their own, and as they get into older age, the real challenge of loneliness, and also the challenge of dual income families leaving less time to care for their grandpas and grandmas. And how is it all funded? If you're largely in private pay, well the over-65s have 2.6 trillion of net worth. I was reflecting in the last month or two that when I did the IPO for this fund, that number was about 1.7 trillion. It's housing equity primarily. So great funding, in addition to the fact that even if they are cash-strapped, local authorities still have a statutory duty to fund social care for seniors. So we're in a good place in terms of the update and the outlook.

So in summary, we've spoken about great real estate quality. This is absolutely a premium portfolio. In terms of the MSCI index, it has absolutely performed. A stable dividend with a yield of 6.2%, doing great social good. A conservative balance sheet with long-term fixed debt. And we see a significant gap between prime and non-prime real estate within care homes. So I hope that's been a useful introduction to the business. We love the privilege of being given money to do this, and we see lots of opportunity going forward as well. Thank you very much.

Richard41:00

Right, thanks, thanks again. If that, yeah, that was good, comprehensive. So yeah, well where we finished off there, maybe we'll take the first question. So we just come in on how, or can you continue to grow the business without raising capital from the markets, given obviously that's difficult at the current time?

Kenneth Mackenzie41:24

Yeah, that is true, and that is the reality of our current situation. However, we've evidenced to the market in recent weeks the ability to sell assets at above the NAV value, and that has freed up cash and headroom. And we already had some headroom, so there is some opportunity for us around that.

Richard41:50

Cool. And then obviously it was interesting you're talking about the demand side, but on the supply side, is it a very undersupplied market and how can you guys and the wider sort of care home developer real estate market provide that supply that's needed?

Kenneth Mackenzie42:15

Yeah, so the macro view of elderly care homes in the UK is roughly 450,000 beds I mentioned. For the 15 years we've been doing this, about 200 care homes a year drop out of the market, but they're typically 20 or 30 beds, and about 100 new care homes are built on an annual basis, and they're typically 60, 65, 70 beds. So the absolute number of beds has slightly dropped over the 15 years we've been doing it, not significantly but a little bit of a drop. But everybody in the market is seeing increasingly tight demand because there are more and more elderly people coming through, and the reality of life and later living is increasing frailty and often dementia the longer we go. So we strongly believe there will be demand for further modern purpose-built homes, partly because the baby boomer went to the Mediterranean instead of little old bed and breakfast of 30, 40 years ago. They never stayed in a home in a hotel which didn't have a shower or bathing facility. And that's one of the strange things in this sector. There are en suites in the sector, some people speak about their en suites, but the en suite is only a WC and a washbasin. But as I tried to describe earlier, we really believe it's fundamental, and the whole sector accepts today that wet rooms are the only way to go forward for holistic personal care for residents. So we're in a great position in terms of the physical real estate we have to enable us to fill the ongoing demand and to work with our tenants to bring more homes to the market.

Richard44:21

Yeah, that's cool. So just moving back a bit, you talked about the market after COVID, things like that. Has the chat, your strategy changed since COVID?

Kenneth Mackenzie44:32

No, if the opposite actually. It's quite interesting. One of our tenants, who now has four homes with us, I remember seven or eight years ago, so well before COVID, saying to me, 'You know, I only operate old homes, Kenneth, with poor own suites, but he said I make good money out of them and you're telling us that we need to go to modern purpose-built homes with wet rooms. My old homes are cash cows. It's a very difficult challenge for me.' And I said, 'Well, if you're committed to the care for the elderly in a holistic way, I would submit that you need to think about the kind of product that we are bringing to the market.' In the first six months of COVID, the same gentleman phoned me up and said, 'You're absolutely right. We realized that infection control in the old homes is really difficult, and we really need to move to modern purpose-built.' And they're in a whole plan and transition towards that. So to answer your question, it has confirmed to us the wisdom of the strategy we're on. Let's not pretend we're clever. If you're in America of course you would have this much better quality home. So we are strong supporters. Would you like to go to a common bathroom for your toileting needs, Richard, after another seven people have been in it in the previous half hour, or would you like to have that done in the privacy of your own bathroom?

Richard46:23

Yeah, yeah, good. That's the reality of this. It's sometimes our bankers tell I'm a little bit indelicate in such matters, and probably the PR agents too. But it is the carers who provide the care to our seniors, we return to being babies in our old age. We need to get our nappies changed. And would you like to have that done in the privacy of your own room? So I don't know how to say it other than by saying it.

Kenneth Mackenzie46:52

Yeah, we got that to look forward to.

Richard46:57

So with regards to your tenants then, you've got, is it 32 or 33?

Kenneth Mackenzie47:04

33 tenants on the books.

Richard47:06

So what's the spread like between that and what's your sort of largest exposure?

Kenneth Mackenzie47:09

Just over 16% for the largest, about 17.7% for the largest. The next we are three or four around the 7 to 9%, and 27 or 28 less than 5%.

Richard47:27

Okay, cool, and so highly diversified. And that goes back to when I started this a dozen years ago. If you look as if you are old enough to remember Southern Cross, and you know the sector had a poorer reputation until we came and did what we're doing in these listed markets and showing that it can create long, stable income. So we recognize there can be risk, but let's diversify the risk away. And if you have 100 care homes, you're never going to have every one of them working perfectly, but generally most of them are working very well.

And the covenant strength, all good?

Kenneth Mackenzie48:18

Yeah, we back it. We have not many people from a private equity background companies. A couple who are private equity backed. Generally we're backing stable family businesses of some scale, not tiny mom and pops. Generally it's usually kind of large SMEs you might call it. So people with, as I mentioned earlier, somebody has 20 homes or 40 homes or 15 homes, that kind of scale. And you know, each of these homes might be making half a million each, so they're not insignificant.

Richard49:00

Yeah, yeah. So had a question here on your dividends. So can they continue to rise with inflation over the next five years?

Kenneth Mackenzie49:10

Don't see why not. Yeah, we would expect our rental income to increase by this 2% to 4%, and so any dividend increase has to be tied to the rental increase, so that's the kind of range that we expect the rents to increase by.

Richard49:35

Yeah, cool. And then so your discount at the moment is around 25%, is it?

Kenneth Mackenzie49:46

Yeah, about that.

Richard49:49

Is there any plans? I know recently you sold a portfolio. I don't know if you want to talk about the recent portfolio sale which was above NAV. The implications on that on your discount, and if there is any sort of other mechanisms you'd be using to sort of bring that discount in?

Kenneth Mackenzie50:12

The recent portfolio sale was an interesting one because the challenge of a prime portfolio is how do you keep it prime. We had the opportunity to sell four of the assets. One of the metrics that is interesting in a care home, just as it is for us all in our own homes, is bedroom sizes. The average square meter of the homes we sold just a week or two ago was about 41-42 square meters, compared to a portfolio average of 47. So that tells you they were homes that had less square meters per resident and therefore a little bit more constrained. Still good homes, and also they were homes that were amongst the oldest in our portfolio. And yet we got a very good price for them, whereby we were able to sell them at a premium to what we were holding them in the balance sheet. So that has been, I think we hope that that gives some evidence that the NAV is real. Whether in the current market there will be much movement in the NAV, especially as we go into the summer, I think we have to be realistic and perhaps pray for more buyers or something.

Richard51:54

Yeah, what do you see the catalyst for a rerating being? Do you think it's more macro side?

Kenneth Mackenzie52:02

Yeah, everybody, that's the comment for everybody. We're actually very thankful that our core shareholder base is remarkably robust and stable and very much communicating to us that they love what we do, they love the way we go about it, they see the manager as somebody who has a long-term commitment to it. And just be patient. You're paying a stable income, we're seeing it's growing, it's doing great social good. All will be well. And I think that we would love to do more, but it's a portfolio of some scale as you know.

Richard52:48

Yeah, yeah. So there was a question here on inflation and the sort of coming out of the high inflation period. Obviously your rents are capped and collared at is it 4% and 2%? That's right. So as we saw in one of the graphs, 4% running through. Has there been any more implications on some of your tenants on inflation, high inflation environment, or have they sort of handled that quite well?

Kenneth Mackenzie53:15

They've handled it really well, and that's best evidenced ultimately by the fact that our rent cover is at an all-time high. But to explain a little bit more, because of the underlying nature of all of that, because it's a high preponderance of private fees, the private fee payer gets above inflation or at inflation increases. And by doing that, the significant increase in minimum wage rates can be paid to the carer. So we think there may be more difficulty in the public fee side, the local authority fee side, with government austerity, and there's good evidence that over the long term that tends to get constrained. But the fees for private fee payers continues to be above inflation. The other thing worth saying is the average length of stay in a care home for a resident is 18 months. So the challenge for the family to get their head round that, they're going to have to pay, or from the resident's estate, they're going to have to pay say £1,200 a week, that's the average fee in our portfolio. But typically it's only one inflationary increase that they will go through, 12 months after they come in. So that's the experience of the private fee payer.

Richard55:05

So just sort of remind us what the split is between private and public in your portfolio.

Kenneth Mackenzie55:10

Yeah, thanks for asking. 71% of the residents are private.

Richard55:20

Okay, cool. And then we got a question here on the new Labour government. Do you think there's going to be many changes there and will that impact on the sector?

Kenneth Mackenzie55:33

There has been talk about changing the sector for about 20 years. And all of us know that the government is cash constrained whatever they decide to do. We think the significant thing to be aware of is that the net wealth of the over-65s is 2.7 trillion of net worth. The sector typically spends, the income for the sector for the 450,000 beds is about 20 to 22 billion a year. So if that was to be totally funded out of the net worth of our seniors, that would still only come in the next 40 years to 00 billion or 2.6 trillion. So I think the government might be able to do that mass as well as you and I. So I think the potential is for that to come more out of the private pay. And that is, as well as wanting to have really good real estate to care for people, we think that is a long-term stable position. It's only one in seven and a half of us who end up in residential care, so it's not as if half the population over 85 ends up in residential care. It's only 13.4% of the over-85s that end up in residential care.

Richard57:19

Okay. So we haven't talked much on your development. You've got a sort of small development pipeline?

Kenneth Mackenzie57:26

Yes, we have two or three homes left to develop. If I'd been speaking to you last year there was five, but three of them, two or three of them have opened. And they're homes that we've been able to influence the way the home was. I was in a home with some investors and analysts two or three weeks ago in Dartford, and that was just a fabulous home. And actually the owners were saying to me, it's down to you that we have such fabulous outdoor spaces here with great balconies and so on. So we have, because we've funded the development of 20 or 30 homes over the life of our fund management life, and because we get P&L accounts from every one of the homes and we physically visit the homes continually, there's a team of four people who visit the homes regularly, we have a view on what a good care home looks like. And so the developments that we see and are brought to us, we're always happy to make some suggestions. We have two or three guys within the business who take great delight in tweaking the layout and trying to improve it in the light of what they've seen work really well over the years.

Richard58:57

So do you forward fund them? Do you then...

Kenneth Mackenzie58:59

Yeah, we can. We either forward fund or we forward commit, because quite often to forward fund...

Richard59:03

And they're pre-let always on a pre-let basis?

Kenneth Mackenzie59:06

Yeah, we've done no speculative development.

Richard59:12

What kind of yield on cost do you get for that?

Kenneth Mackenzie59:14

It's typically the same yield on cost as you get for the long-term lease that's put in place, because 35-year lease. Part of the pre-let in the early days there might have been 50 or 75 basis points of premium, but as more and more people have seen the stability of what we've been able to do with this fund, we have seen other people come into the market and compete, and therefore that has been less remunerative than we might have liked.

Richard59:48

Are there any more plans to put more capital into development pipeline?

Kenneth Mackenzie59:53

Yes, yeah, there is. And one of the great things about having 32 different tenants is that often a few of them will always have an idea about the next home, and so there are ongoing discussions about further developments.

Richard1:00:16

That'd be cool. Question here on how would you say you differentiate yourself from other healthcare REITs? I know your closest in the UK is Impact Healthcare REIT, a couple in Europe as well. How would you say you differentiate yourself from those?

Kenneth Mackenzie1:00:36

There are four healthcare REITs really in the UK: the two GP surgery funds, Impact, and ourselves, and then there's a European REIT that has some UK assets. So when in the presentation I made reference to listed peer groups, I was referring to that European REIT plus Impact. It's just really different stock. On en-suite wet rooms, as I said, almost 100%. Impact, I think I'm not sure exactly what the numbers are, but it's less than 30% of their beds have wet rooms. Whereas 97% of our product has been built in the last 15 to 20 years. Their percentage is more like 70% of it is older than the 2000s. So it's just really different: it's more the older product versus modern product. And the difference in wet rooms, I think, is a great way of thinking of the difference between the two. And then it's for us all to make a conscious decision as to whether you want your residents to follow into all that I described earlier, Richard.

Richard1:02:15

Yeah, yeah, yeah. So it's just really different. And the other interesting question in the whole sector is where net initial yields are for the secondhand stock, as some might hold, compared to prime portfolios. The American REITs are currently buying secondhand stock at around about 10% initial yield. So it's just really quite different.

Kenneth Mackenzie1:03:00

Yeah. And one of the things you pointed out in the presentation as well is your EPC ratings. I don't think I've seen a portfolio at sort of 99% A and B. Is that just have you put in a lot of capex over the years, or is that just sort of how...

Richard1:03:10

We bought brand new homes. Brand new homes tend to be quite well insulated, especially for seniors. It's just everything's new in what we do. When we set out originally, I always remember a panel I was sitting on about four or five years ago, and I was introduced as the founder of the first social impact fund in the UK. And I kind of looked at the chair of the panel saying, 'Oh, thank you, I'm not sure that I realized I created that.' When we set out, we decided that we would buy really good new buildings, and we are of course 100% in the social care space. And if you're going to be serious about social care, you'll provide good privacy for your residents in terms of personal care, which is the indelicate thing I spoke about, and you'll also have best practice governance, so that as a manager we're not involved with the operating of any of the homes ourselves. The result of that is the first social impact fund. We didn't know we were going to create the first social impact fund, but it just seemed like good practice to create that kind of product and to invest in that kind of product.

Yeah, that's cool. So rental growth forecast for the next year? Obviously, 2-4% now, yeah. So RPI is higher than that, so the rental growth will be whatever RPI is. It's all predicated on RPI, not CPI. So who knows, three and a half or 4%. I guess that's where it'll be.

Kenneth Mackenzie1:05:17

And if you thought about diversifying the portfolio into other geographies outside of the UK, healthcare sectors?

Richard1:05:26

A little. And also other product. In fact, we're probably glad that we didn't diversify. For example, the whole kind of sheltered housing stuff that other REITs have done, and they're kind of allied to this. I remember we looked in great detail at a scheme in the Blackpool area 10 years ago, and we just said to ourselves, 'I don't get how all of this works over the long term.' We couldn't get the housing associations by paying committing to the rental levels. So we know this really well. Our tenants send us monthly P&L accounts for every one of the homes. Every night I know occupancy across our portfolio. And we have four people who physically visit the homes on a minimum of two or three times a year. If we have concern, they'll probably be in it every two or three months. So we just have a lot of visibility of what our underlying tenants do. And in fact, our tenants find our interaction with them really enabling. We've just completed some independent research for some of the sustainability stuff that we report on, and we're just in a really good place in terms of the perception of our tenants as to what this landlord is like and how we compare to others. In the past we've done that direct with them, but we thought this year that we would get an independent body to ask all the awkward questions. You'll be glad to know that I think I just read it on Tuesday or Wednesday this week that it's been a very satisfactory response.

Oh, I just sort of noticed the time. So one last question I'll sort of set you up here with a nice finisher. Is now a good time to buy into the trust?

Kenneth Mackenzie1:07:31

Obviously, yeah, yeah. Now, if you want long, stable income, 26 years of income in front of you that will have some inflationary increase, with an underlying portfolio that has got tailwinds that are just, you know, 40 years hence there's an awful lot of elderly people. And the other thing to remember is at the moment there are 4.5 working age people for everybody over 65, and that drops to 2.5. There's going to be a lot of elderly people. You won't be able to do it by domiciliary care. They will have to be housed together. You better have the right real estate for 40 years of growth. So yeah, absolutely. We love what we do. It's a great mission. We love to visit homes, see people living well in their later years. And they can live really well in their later years. So it's a most honorable mission. We love it.

Richard1:08:33

Yeah, no, it's come across. And yeah, well, thanks a lot for coming on. That was really interesting. I hope we get you on maybe in a year or so's time, see how it's all sort of progressing. Love to do that.

Kenneth Mackenzie1:08:44

Thank you very much.

Richard1:08:46

Thanks a lot, Kenneth. Have a good day. Bye.

James1:08:49

Oh, so that just leaves me with the legal bits. Look at those on the playback at your own time. But so here's the lineup we've got for all the way through to September now. So I'll be back on in a couple of weeks interviewing a, but next week we've got Chris Clover from Capital Gearing. So we hope to see you guys back then. Have a great weekend.