colin wrote:dealtn wrote:
The occupants of their properties certainly can go elsewhere. They can go bust! More than 100 such homes went bankrupt in 2018. In 2019 Four Seasons Care, alone, went bust with 322 homes.
The tenants are not the occupiers, Four Seasons went bust because it's private equity business model was based on a high level of debt, there are few REITs with lower debt than THRL they have invested in modern ensuite facilities which will always be in demand.
OK, you clearly don't get it, or choose not to.
The occupants of the properties are not the residents, but the care providers, who pay the rent to the freeholders. The "residents" pay their fees to the care providers, not to the freeholders, whether that is a REIT or anyone else. In turn the "residents" can go elsewhere. Many of them die. The average residency is about 2 years. Others can move from one care home to another, some on cost grounds.
The owners of the buildings that were rented to the care providers didn't get their rent in this instance. If you think that can't happen to Target Healthcare as freeholders, then fine.
In the case of Target their rental increase on a like for like basis was 1.1%. With rental streams typically RPI linked this is a sub inflationary outcome.
If you look at the latest Investment Managers report (March 2020) you can see that Target had one of its 27 tenants, representing 6 care homes, exit their tenancy (not Four Seasons). No impact on "residents" but requiring renegotiations with the replacement provider, on broadly similar terms (although it appears initial rental incentives were required).
Target look to be a good company, have a diversified portfolio, and experience in the industry. That's not in doubt. But if you think they are immune to macro industry issues you are wrong. They may be better equipped to deal with such outcomes, compared to owners of smaller, less modern homes, with ensuite "wet" facilities, and wide corridors, but that doesn't provide complete protection from macro events.
It will be interesting to see how this sector plays out, not just due to the virus, but the political situation surrounding care. The evidence of how difficult it is politically to deal with this industry is all too apparent from the Conservative manifesto under PM May. It may well be the case that difficult decisions are more likely now, because of the virus, and that consensus across the political spectrum to legislate occurs. Or it may be that Johnson, as opposed to May, having a meaningful majority, will be keen and able to reform anyway. Alternatively, the fiscal constraints the chancellor has to work with, and at Local Authority level too, post Covid, will be harmful to the sector financially compared to before. We just don't know.
All the best to anyone invested in the sector, and here in particular, but there are reasons why property yields, and dividend yields, for care home properties and investments are higher than other property alternatives. There are no guarantees that yield compression will occur.