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185. Bull, Bear & Beyond – Target Healthcare REIT: executive interview
11 Plays12 days ago
In this video, we interview Kenneth MacKenzie who founded Target Healthcare REIT (THRL) in 2013 and who is CEO of THRL’s manager. THRL had another strong quarter, extending its consistent record of financial returns since it launched. Kenneth discusses how THRL’s focus on modern, purpose-built and future-proof homes, active asset management and a diversified income base all contribute to its performance, its strong sector fundamentals and THRL’s ability to profitably deploy available capital and help meet the essential need for good-quality homes over many years to come.
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About ‘Bull, Bear & Beyond’
Bull, Bear & Beyond': features candid conversations with senior executives and from our own team of experts from across industries, exploring strategy, innovation, and the opportunities shaping their markets and 60-second pieces are a compressed summary of content designed to convey our message in a single, easily shareable hit.
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Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to Kenneth McKenzie
00:00:07
Speaker
I'm Martin King, property analyst at Edison Investment Research, and I'm joined today by Kenneth McKenzie from Target Healthcare care REIT. Kenneth was founder of the company back in 2013, and he's also chief executive of the investment manager.
00:00:21
Speaker
So there's nobody better placed to talk about the company than Kenneth. So welcome,
Mission and Financial Performance Discussion
00:00:25
Speaker
Kenneth. Well, we love to talk about the company because we're on a fabulous mission, Martin. and the The care of seniors should be core to the the the well-being of our nation.
00:00:38
Speaker
Because last week you published the latest quarterly update. It was for the period to the end of December. And it was another period of very strong financial performance with inflation-linked rent reviews driving both earnings and dividend growth and also a rise in the NAB.
00:00:55
Speaker
There's also some good news on rent collection and also on your capital deployment.
Quarterly Report Overview
00:01:00
Speaker
um Could we start and perhaps you just give a a very brief overview of the quarterly report, but then we can talk in fact in more detail on the strategic and operational progress that you're making.
00:01:14
Speaker
So for sure NAV went up to 119.4. So there was a 2.7% I think return for the quarter, which was encouraging. But a the the core strategy here from the very beginning has been to invest in modern purpose-built homes because actually we're only really at the start. We're 13 years old.
00:01:37
Speaker
But we're only really at the start of what's happening in the demographics of our seniors. There's going to be vastly more seniors coming through who will need residential care.
Market Position and Strategy
00:01:49
Speaker
The physical real estate around the UK is generally substandard. And so there's a lot more to come. And...
00:02:00
Speaker
By being in this critical part of the market which is future-proof and which is stable, and by signing these very long leases, 35 years, with inflation uplifts, albeit capped at 4%, it puts us in a really good position if you can find operators that love working with you and that are interested in the long-term care of seniors.
00:02:25
Speaker
They make good money and we make long stable rents.
Re-tenanting and Property Benefits
00:02:30
Speaker
You made a little reference to rent collection improving. Post-COVID, there was some hiccups from some of the rent collection stuff, but we see that largely behind us and we're in a really good place on that.
00:02:42
Speaker
Kenneth, there were a number of re-tenanting projects completed during during the quarter, and and those are a recurring feature. Could you talk a little bit more about how those and how you work with tenants? Yeah. So the core part of all of that is, do you have real estate that somebody wants to tenant?
00:03:01
Speaker
And the fact that we have modern purpose-built real estate and often best in class in the 10-minute drive time enables us to re-tenant more easily than if it's an old second-hand home.
00:03:13
Speaker
and in In terms of this recent these recent quarters, there was one particular home where the tenant had challenges across the rest of its portfolio, actually poorer, older homes.
00:03:27
Speaker
And initially the home that we had with them had been performing well, but he lost focus on it. And while we were intending at that stage to do a consensual retenting, which is what we've done over the years,
00:03:43
Speaker
For the first time in the 13 years of the REIT, we put him into administration and a went through a process where we invite new tenants to come and look after the home.
00:03:54
Speaker
And in fact, we had many offers for the home. And indeed, the offer that we got for that particular home was some £25,000 higher than had been available to us previously, which was pretty encouraging. And that tells you about the quality of the real estate and operators recognizing that these are good homes with good long term potential.
Transaction Strategy and Income Diversification
00:04:18
Speaker
So tenant retenanting is something that we do because there's retirels within the sector. There are people wanting to move focus to another area. um And the statistic, if it's helpful,
00:04:31
Speaker
is that we have done 23 retenantings over the 13 years of homes, but we've had, we think about 760, this was a few months ago, years of stable income.
00:04:46
Speaker
And it's very, very small, other than what's happened to us this last year, where we ever lose rent. In most of them, it's consensual, rent is paid, and we move on to the next tenant. So it's it's probably a very um important it is a very important part of what the manager does with deep relationships across the sector.
00:05:08
Speaker
I know you work with ah a lot of tenants, Kenneth, over 30 tenants, I think, in your portfolio. You did a very large transaction recently, the largest you've you've ever done. ah There were some very good financial and and ah portfolio reasons for doing that, but also a byproduct was spreading the tenant exposures more widely. Would you like to talk about that transaction, but also what you're doing with the but the proceeds? Certainly.
00:05:36
Speaker
So that transaction whereby we sold nine homes at 11% above our holding value, it was related to a tenant that had worked with us from the very beginning.
00:05:48
Speaker
ah He was a privately owned business, or it was a privately owned business. And in time, they ultimately they sold the business to... a company called HC1 who are the largest operator. We hadn't chosen to ever have HC1 as a tenant but we weren't able to stop the transaction and that was I'm sure beneficial for our original tenant.
00:06:13
Speaker
And at the time of the transaction we said to ourselves at some stage we'd be interested in reducing our exposure to that a new tenant. And so that was all part of that decision that at a convenient time and when there was an offer that was attractive to us, that we would do that. And we reduced it from about 16% of our tenant role to just over 8.5%, 9% of our tenant role. So that was that transaction.
00:06:43
Speaker
That, of course, enabled us to have quite a lot of money and a little bit of extra cash compared to NAV. And... a Within a couple of months we made an announcement that we were committing about half of that capital to a new transaction and a new tenant.
00:07:00
Speaker
So that in fact today and we have no tenants greater than 10% of our income. We have four or five around about the eight or nine percent of our income and then a whole bunch of smaller operators.
00:07:15
Speaker
From the very beginning again we decided we would be a highly diversified income source. You and I are old enough to remember Southern Cross and the travesty for shareholders of some of what happened in the sector 10, 15, 20 years ago.
00:07:32
Speaker
And we set out and spoke to all shareholders about recognising it was an area of risk, but that we would manage it well. And that part of that strategy would be that we be we would have a highly diversified a a tenants across the sector. And that's what we have, as you say, mid-30s.
Tenant Performance and Dividend Stability
00:07:53
Speaker
it tenants and it and of course we monitor the performance of all our tenants probably much more than is common in commercial real estate.
00:08:05
Speaker
So we know occupancy in our homes every Friday night. a We know P&L accounts in our home on a quarterly basis. We physically inspect our homes. I think last year we did a several, yeah I know we did, several hundred physical visits of our homes. with There's a group of four in the business that that is their full-time job, as well as some of my more senior colleagues actively.
00:08:32
Speaker
We love to visit the homes, to be honest,
Reinvestment and Regulatory Strategy
00:08:34
Speaker
Martin. it That is the is the reality of m providing a stable dividend to our shareholders that the homes are operating well so our rents are stable.
00:08:48
Speaker
So it's an absolute privilege and it's actually a privilege to see the way carers are looking after our seniors. and And when it comes to redeploying that capital, Kenneth, I know you've got a lot of, you see a lot of opportunities out there for accretive investments that will enhance the portfolio, provide more care to to the ultimate users. Can you say a bit more about the the opportunity that you see, how much capital you've still got to deploy?
00:09:15
Speaker
Yeah, we've got about 100 million to deploy and pipeline is well in excess of that. Now, not all of the pipeline will come through to that 100 million be deployed, but because it's well in excess, we expect to be able to deploy that capital expeditiously in the coming year.
00:09:35
Speaker
um Typically, net and issue yields in our space are around about the 6% level, and that's the that's ah broadly the the pricing that we will deploy at going forward.
00:09:47
Speaker
There's some competition from it for it, and we will a I think one of the really good places we have got to in the business to- today, and I sometimes reflect on this compared to 13 years ago,
00:10:04
Speaker
We're seen as a long stable partner for a number of tenants. They see that our healthcare engagement is quite helpful to their business. And the result of having mid-30s tenants is there's always half a dozen of them saying, we're wondering about this home over here.
00:10:23
Speaker
What do you think of it? tim And that's with our investment team, A third of our time probably is spent engaging with our own tenants, looking at sites.
00:10:35
Speaker
I sent them a couple of sites this morning that somebody had written me about. And and that's that's a core part of of how that all works out now. The site I sent today, if we get interested in it, you'll hear about Ed Martin in about three or four years time.
00:10:51
Speaker
So there's ah there's quite there's a lot of work going on in the background which provide the fundamentals to the long stable income that we're thankful to offer our shareholders. And the assets that you you see to buy, these are all new, modern? modern Without exception, we will have modern purpose-built care homes with bedrooms.
00:11:13
Speaker
I think I've spoken to you many times about um our view that because of the continence issues in the the residence, a having continence issues dealt with in the privacy of your own bedroom is what you and I would want.
00:11:33
Speaker
Do to others as you would have them do to you is a golden rule. And we think of that actually on also in relation to our shareholders. Well, going back to the shareholders, obviously, there's a bit of a gap between selling assets and buying assets, and that has a little bit a drag on on income in the near term. but But as you reinvest and and and deploy the capital you've got, that will that will change, and you know it should see quite a... Patience is the name of the game for that, I'm afraid. And you you cannot today buy a care home in six weeks. There regulatory as well as regal legal matters. So you you have to work it through in a diligent and careful manner. Yeah. But you're
Dividend Growth and Lease Structures
00:12:19
Speaker
targeting dividend growth this year and and that yeah on a fully covered basis. And I think that's still the case, regardless of any drag. Yeah.
00:12:26
Speaker
And it sounds as though with the capital to be ployed at the rates you're talking, that sounds you in very positive fur for your progressive duit and policy to be continuing.
00:12:39
Speaker
We're very thankful for the portfolio we have and the way it's performing and how it's all funded upon robust leases. You know, in many ways, the leases that the sector is now using are largely based on some of what we created 15 years ago.
00:12:56
Speaker
So we're in a good place on that. yeah And yeah largely those earnings are completely divorced from what's going on in the wider economy. And I think you' you know people worry about the but the the the position of local authorities, but I think overall your portfolio has got much less exposure to that than that would be generally the case.
00:13:16
Speaker
So generally, in the the sector has about 70% public pay, whereas we're nearly 80% private pay.
Conclusion and Shareholder Gratitude
00:13:27
Speaker
And one of the big things, i remember you and I speaking 10 years ago, I'm sure, and one of the big changes, when we did the IPO, I remember net worth of the over 65s, the number I think I used was 1.7 trillion, 6.6 trillion The sector only sucks up about 25 billion a year of income.
00:13:50
Speaker
40 years of that doesn't just't take a trillion of it. So plenty. Stay private. Well, thanks very much, Kenneth. That sounds very good, very promising and and good for shareholders and good for society.
00:14:04
Speaker
Yes, we're thankful for the opportunity to be able to do this. And we are thankful for our shareholder base being so supportive of the mission.