Britain’s ageing population is a huge opportunity for patient investors looking for steady returns.
With pensions liberation day, the investment funds industry is quietly rubbing its hands with glee. The UK consumer sector – not to say the buy-to-let sector – should be due a sizeable boost as any number of silver-haired investors look to put their money in almost anything that isn’t an annuity.
As I’ve mentioned before, I think smart retirees will focus on income investments listed on the stockmarket. Their key consideration will be solid underlying assets, a decent balance sheet, strong cash flow and a generous dividend yield of 5% or more per annum. That’s likely to include “asset-backed” funds of some sort, such as real-estate investment trusts (Reits), defensive infrastructure funds and some arguably riskier funds that focus on asset-backed loans.
However, these income-hungry silver surfers will need to make sure they are properly diversified. They shouldn’t bet everything on pure public/private infrastructure or West End property – both of which are undeniably quality investments, but perhaps overpriced. They need to stay alert for new trends and themes that can help sustain a robust income. They should even be a little daring and focus on stuff they understand, such as our ageing society.
Put bluntly, our society is ageing at a rapid rate, and more of us will require specialist care in our old age. This longevity bonanza should be good news for those businesses involved with what we can broadly call our “social infrastructure”. And sitting pretty in this potentially huge – though sometimes controversial – market is London-listed Reit Target Healthcare (LSE: THRL).
Target focuses on owning very new care homes for the burgeoning army of older folks who need lots of extra help. Demand for this is constantly growing, but standards in care homes are very variable.
Target doesn’t manage its homes – that’s done by specialists who sign full repairing and insuring leases subject to RPI uplifts (inflation-linked price increases) – but it believes the smart thing to do is to own purpose-built, modern facilities where clients will pay a premium.
My own experience backs up this strategy. My great-uncle Fred lived in a wonderful council-owned care home right next door to the M1 in Leicestershire and I can say the level of service was excellent. But it cost the county council a huge heap of money – money it probably can’t afford to spend in these austere times.
The private sector is increasingly important, but the ensuing care level is massively variable. Sometimes simply throwing in a huge amount of money provides high-quality care in five-star facilities.
Good private-sector managers with a great staff and a world-class service ethos can also make the difference. But for me the actual fabric and design of a care home is the key factor. Has the facility been specifically designed to meet the very latest standards? Can those staff servicing the clients really call on the facilities needed?
This gives an automatic bias towards newer facilities, where pastoral standards should be much better. To fund this new social infrastructure requires patient, long-term money. And that’s where Target Healthcare comes into the equation.
The Reit has been quietly snapping up homes around the country. A good example of a property in its portfolio is in Tonbridge, Kent, where Target has invested £12.5m, including acquisition costs, in developing a 101-bed care home. This is expected to be completed in summer 2016 and has been pre-let to the Abbeyfield Kent Society, a charity that provides care and housing for around 500 people at 14 locations across Kent.
An attractive set of figures
So what do you get if you invest in Target? The numbers look solid. At the end of 2014, the portfolio consisted of 27 care homes with a market value of £135.6m, according to the latest half-year results. The net initial rental yield on the properties is 7.1%, while the average unexpired lease term is 30.2 years.
The annualised rent receivable from the portfolio stood at £10.5m, a 64.1% increase over the course of the second half of the year. Total operating profit was £3.4m, equal to earnings per share (EPS) of 3.2p. This figure rose by 91.6% from 1.67 pence per share over the half year.
The balance sheet is also robust. Target has a five-year £35m term loan and revolving credit facility with RBS; at the end of 2014 the fund had drawn down £27m of this, representing a loan-to-value (LTV) of 19%. In the event that it draws down the full amount, gearing would be expected to be approximately 24% of gross assets. However, the board has said that it intends to target a long-term average loan-to-value ratio of 20%.
Overall, Target strikes me as a sensibly run outfit with modest ambitions. I’ve held back from talking too much about it in the past because it’s been a fairly small firm with a modest market capitalisation – it raised just £45m at initial public offering in March 2013.
But since that listing, Target has steadily grown its asset base and raised a further £67m through a secondary issue of shares, at an average premium to net asset value of 5.4%.
Then, early this month, it raised gross proceeds of £25.5m from another placement, this time at a premium of 6.8%, adding more firepower for further acquisitions. The market cap is now almost £150m and a further 52.7 million shares can be issued under the current placing programme.
Target is now big enough to matter to investors and analysts, while the increased market cap should also help reduce the bid-offer spread and make the shares more liquid. They traded at around 104p earlier this week, which isequivalent to a 8.6% premium to its net asset value. That’s not exactly cheap, but I think we could see the premium hit double figures.
Meanwhile, it currently seeks to pay an annual dividend for the financial year to 30 June 2015 of 6.12p, distributed quarterly. That’s a yield of 5.9%.
The start of a bigger opportunity
Target is an example of what will be a huge social infrastructure opportunity over the next few decades. I think the same business model could also work in a much broader set of markets, including for adults with learning difficulties.
My partner works in this area and she says that the standard of care at homes is “lamentable”. The whole social-care sector needs modernisation and the introduction of more commercial management standards, focused on delivering better outcomes for patients. We’ve already seen public infrastructure emerge alongside medical property funds, but soon we’ll see new forms of social housing plus top-grade social care properties – as well as student housing, of course.
There are some obvious risks with this model. Political policy could change: maybe the Green Party gets its way and we effectively nationalise our elderly care system. Realistically, I think this is unlikely, but there are potential operational risks for funds such as Target.
Too much money could swamp the sector, driving down yields. Careless care-home operators could lead tomore scandals, dragging the Reits that own the property into a public relations disaster. More broadly, a poor choice of operator could destroy the income stream in any case.
However, I think the risks are manageable and any investment in providing a modern, friendly care home system is to be welcomed. Add in an attractive dividend stream and a cautious manager and you have a good but adventurous bet for income-hungry investors.
Price war slashes fees on ETFs
Here at MoneyWeek, we’re always telling you to watch your investment costs, writes Matthew Partridge. You can never be sure of exactly how your investments will perform, but you can be sure that – due to the power of compounding – the more you pay in annual trading costs and management fees, the less you’ll have in your savings pot by the time you come to take it.
That’s the draw of ‘passive’ over ‘active’ investing – you get broadly the same return as the underlying market at a low price, versus the prospect of paying an expensive fund manager who may not be able to meet their promise of beating the market.
However, up until recently, one problem with UK-focused exchange-traded funds (ETFs – a key type of passive investment) was that they were significantly more expensive than their American equivalents. Indeed, some weren’t that much cheaper than the least-expensive active funds. So that left plenty of scope for providers to bring down their fees even further.
And it seems that the Retail Distribution Review regulatory reforms – which have made financial advisers much more cost conscious – are finally having an impact. Last week, BlackRock decided to slash the cost of some of the ETFs in its low-cost iShares range.
In particular, it cut the annual management charge for the iShares FTSE 100 UCITS ETF (LSE: ISF) from 0.4% a year to a minuscule 0.07%. The ETF was the first to list on the London Stock Exchange, 15 years ago. It tracks the FTSE 100, paying out any dividends.
Its sister fund, iShares Core FTSE 100 UCITS ETF (LSE: CUKX), which tracks the FTSE 100 too, but automatically reinvests dividends, also had its management charge cut to 0.07%.
BlackRock is trying to defend its market share from a growing range of competitors who have already cut fees. In February, for example, Deutsche Bank reduced the annual charge on its db x-tracker FTSE 100 UCITS ETF (LSE: XUKX) from 0.30% to 0.09%, which is the same as its Dax and EuroStoxx 50 ETFs. Meanwhile, the Vanguard FTSE 100 UCITS ETF (LSE: VUKE) also has a management charge of only 0.09%.
This is all great news for investors. Better still, Adam Laird, head of ETFs at Hargreaves Lansdown, believes this price war could push down costs even further. Indeed, two of the cheapest American ETFs, Charles Schwab’s US Large-Cap ETF (NYSE: SCHX) and Vanguard’s S&P 500 ETF (NYSE: VOO), have total expenses ratios of 0.04% and 0.05% respectively. This price war isn’t over yet.