Copyright: David Lawson 1996
Ironically, the special purpose vehicle (SPV) created, NHP Securities No 1, would merit a full listing while the company is still limited to the Alternative Investment Market (AIM). This raises the possibility that the Stock Exchange may allow an early promotion to full public flotation rather than wait until NHP automatically qualifies next summer.
That would cap a bountiful inaugural year for chief executive Richard Ellert, who has seen pre-tax profits boom more than 700% to £1.14m on tripled turnover of £3.5m. NHP invested more than £47m in the year to September in 25 homes, boosting its portfolio to 48 premises. Now the aim is to float off around £100m of assets, matching the 25-year bonds to leases on homes and fund further expansion.
Investor enthusiasm reveals a further irony, as doubts still hang over this whole sector. A few years ago stories emerged about huge potential returns from nursing homes as a 'demographic time bomb' ticked away, with the proportion of elderly and inform people growing. The statistics were recalculated, however, postponing this explosion. This was too late for new operators who jumped on the bandwagon, threatening to swamp the market. Meanwhile, government funding of patients began to dry up.
'I admit the market was oversold,' says Ellert. But he insists that demand will grow. He is not alone. A shrewd operator like Nigel Wray is also betting on this race, turning Carlisle from property to healthcare. Abbey Life recently spent £27.5m on eight nursing homes and BAe Pension Fund bought one for £4m. NHP has one major advantage: it is not an operator but a financial vehicle, packaging investments for high-yield funds. It restricts activity to buying and leasing back modern, purpose-built properties to the top half dozen or so operators.
'Overcapacity comes from small, private homes run in converted houses,' says Jeremy Davies, an estates director with long-term experience in the sector. These will phase out under tougher new regulations and the rapid rationalisation now under way. Large concerns expect to flourish - albeit further into the next decade than anticipated. Disenchantment by lenders mean they cannot raise the typical £600,000 equity needed for a 60-bed home. Nor would they want to tie up capital.
NHP saw the possibilities early, raising £14.5m through the AIM float early last year. Demand from healthcare operators was so heavy, it went back to its institutional investors for another £15.6m in the summer. One major problem loomed from US operators who are well versed in this field and looking hungrily at the UK. NHP killed two birds by selling a 20% stake to one of the largest, Meditrust. It raised another £9m in equity which can be geared up to £20m of debt and forestalled any move to muscle into the UK market.
Meditrust also feeds in expertise from a well-established healthcare market and the promise of more capital if required. But perhaps most important to UK funds is first-hand knowledge of US real estate investment trusts. Meditrust is a REIT worth 2bn dollars. NHP is a REIT in waiting. Ellert admits this kind of tax transparent vehicle is a prime ambition.
Things are not all sweetness and light, however. Yields are high - around 10.5%. This is because there is no market, says Ellert. He is even planning to sell property he would rather keep so he can create a benchmark. Paul Saper, analyst with brokers Laing & Buisson, frowns over NHP's £700,000 operating charges, although Ellert insists these will be diluted as the portfolio grows. There are also fears over buyback rights held by each operator. On the other hand, investors get leases they would kill for elsewhere: geared to turnover but also with upward reviews. The crunch will come in the spring with a price set for the securitisation. But informal reaction so far looks as though it should be a winner.