Care / Nursing Home Funding
Care homes are viewed as niche assets by lenders. Following changes to legislation on access, room sharing and the move to en-suite facilities a lot of the “old stock” of converted residential property has left the market, being changed into other use. Modern-day homes are typically purpose built and because of this there is often little alternative use, therefore lenders are reasonably conservative in their approach to and look at the trading performance of the business first and the ability to service debt, then the asset.
The other angle is that the last thing a lender wants to do is repossess a care home and make the papers for turfing out the residents. Care homes are thankfully rarely repossessed however they are sold on in trade sales to other operators and unless the lender has structured their debt carefully, they may not recover the loans provided to the operators.
High quality, experienced staff really matter. Care homes are one of those few businesses where the actions or inactions of the staff can close a business overnight. A care home with a poor CQC rating can be very hard, if not impossible to refinance.
In our experience 50-60% loan to value is typical, however this is underpinned by debt service cover of 175%, i.e. the loan repayments on a capital repayment basis are covered to 175% versus either adjusted earnings before interest, tax and depreciation (adjusted EBITDA) or CFADS (Cash Flow Available for Debt Servicing).
Successful operators rarely stop at one facility, it is common to see operators utilising the economies of scale from a centralised finance, HR and admin function to run several facilities. Operators sometimes stick with one sort of care provision, but more often they move into niche areas of care to spread their sources of business to create a multi-disciplinary business that is not exposed to one particular stream of care. This is prudent because funding provided by government can change. It also opens doors to other care intensive but highly remunerative provisions.