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| Avery Healthcare to double its portfolio by 2014 |
Having secured £40m in development funding from private equity firm Graphite Capital and the Royal Bank of Scotland, Avery Healthcare managing director JOHN STROWBRIDGE talks to Caring Times editor GEOFF HODGSON about the history of the company and his plans for future growth
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Caring Times, February 2010
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Avery Healthcare was primarily a coming together of John Strowbridge, pictured, and Ian Matthews, formerly of Westminster and Barchester in 2005.
'In the latter part of that year we agreed to come together with Graphite Capital with a strategy of developing high quality care homes, both by acquisition and new-builds,' said Mr Strowbridge.
'Nothing particularly exciting about that at that time - a lot of people were doing the same. That group grew fairly rapidly up to 21 units into 2007.
'At that stage, from a commercial perspective we were doing a very good job on the caring side, but we believed at that time that the market had peaked in valuation terms and thought it was time to pass-on some of the assets. Being backed by private equity there was an opportunity for some rewards to be taken and we sold 16 care homes to Southern Cross in June 2007.'
Avery's timing was enviable; in late 2007 the credit vice began to tighten and some very costly chickens were coming home to roost in the rafters of the major banks.
'From 2007-08 we went carefully back into the market with a slightly different strategy of only doing our own new-builds and not making any acquisitions,' said Mr Strowbridge.
'We had become quite particular about the quality of asset we wanted to hold on our balance sheet, so ever since then we have done all high quality, purpose-built units ranging from 45 to 90 beds - fairly traditional in terms of nursing, dementia and residential care. However, we soon used up our existing facilities so we have now gone back to private equity - Graphite Capital and the banks - for some additional facilities to continue this vein of growth.'
I asked Mr Strowbridge what made Avery a good risk in the minds of financiers who have otherwise made 'caution' their motto as the recession grinds on.
'We have some factors which we think have enabled us to secure the further debt,' he said.
'We have a very experienced management team, we are not over-leveraged compared to a lot of the medium and large providers who are leveraged between 8 and 10 times earnings, or they are highly leveraged through sale and leaseback and the cost of leases. All of our new homes are doing very well - all the rooms have hotel-type ensuites - they are filling quite quickly, and our mature homes are running at 97% occupancy, so these factors have allowed us to take on further debt and continue a strategy that is working.'
*Looking at the longer term*
Is the slow rate of economic recovery, the threatened public spending cuts and erosion of self-funders' capital of any concern to Avery and its backers?
'This phase of our growth with Graphite Capital - because of the fund we are in, which can go out to seven to 10 years if necessary - we can take a longer term view. We currently run with 65% private-pay clients so we minimise the effect of the potential local authority tightening which is coming - we haven't actually seen much of that yet although it is of concern to the industry. Nor have we seen the inability of the private client to pay through the difficulty of raising capital or selling their properties.
GH: 'But have not many self-payers been funding their care using interest earned on savings and investments, and with interest rates being as low as they can be, isn't the asset base of this group being seriously eroded?'
'That is a very good point which I have myself raised as an area of potential concern but it has to be said that we have yet to see it. Again, 65% private pay, which is increasing, doesn't fit with those concerns. They may yet bite and have an effect over the next 12 to 24 months, so I'm not saying that the danger has passed.'
John Strowbridge points to the over-arching demographic of an ageing population and the law of supply and demand.
'If one looks at the graphs in some detail - the number of elderly clients has started to increase, we think this is having an effect already,' he said.
'We think the better than predicted health of the nation is having an effect already and on the supply side, over the last two to three years, apart from ourselves and one or two others, there has been no real build of care home beds in the UK. The difficulty will be there, continuing for the next two to five years, of the availability of capital to build what are very capital intensive developments.'
*Sites and C2-use*
In recent times, _Caring Time_s has regularly reported care providers' unhappiness with local authority planning policies and the difficulty of acquiring sites suitable for care home development. Avery's experience suggests both these issues are becoming of lesser concern.
'We find that another benefit for us at the moment is an abundance of sites, and C2 use is normally achievable with planners because of the perceived need in the area wherever we're developing,' said Mr Strowbridge.
'This has changed in the last three years - it appears that local authorities have recognised the demand. The work which each social services department is doing within their local authority has now started to be fed through to the different departments and the planners have, in effect, been asked to look favourably on C2 development.
'We also have a high closure rate of local authority care homes and these need to be replaced, and this is normally accepted by the local authorities. And of course property prices have come down, but there is the important caveat of whether the banks will give you any money.'
*Operational aspects*
Avery Healthcare is expected to more than double its portfolio from 12 to about 30 care homes over the coming two to four years and is looking to acquire new sites across the length and breadth of England.
'Geographically, we have a fairly wide policy,' said Mr Strowbridge.
'Because we have homes stretching from Salisbury to Sunderland, we will continue to look at anywhere in the country. We have an operational team which is strategically set through the spine of the country so we can look after our homes wherever they are.
'We have a policy of employing high calibre managers and that has had a knock-on effect in that they tend to employ very capable people themselves and this makes the homes easier to manage from a geographical perspective. We are not fire-fighting all the time and linked to that, all of our homes are excellent rated, apart from homes which have just been inspected as you can only get a good rating on the first inspection.'
Avery Healthcare is one of many provider groups which see the benefits of the 'star ratings' system introduced by the previous regulator as outweighing its drawbacks.
'We hear that the Care Quality Commission will continue the quality ratings system,' said Mr Strowbridge.
'We were concerned that the ratings system would be scrapped but it appears their intention is to keep it. This is good news because for years, we have been trying to find a way of telling people what we do, and, frankly, setting ourselves apart from other providers. We have that opportunity now and it would be a shame if it was taken away.Quality ratings are a good thing, not just for us and the promotion of our business, but for people using care homes. Before the introduction of quality ratings, people had no way of gauging the quality of a care home. It also puts some pressure on commissioners.'
How does Avery Healthcare's managing director see the sector developing?
'I think that there will possibly be some flotations on the stock market of some of the bigger organisations over the next two to four years, as a way again of private equity or private owners seeking to realise some profits. Many will remember that public ownership was popular in the 1980s and early 90s and I think there will be a return to this.
'I don't think consolidation of the sector will resume in the forseeable future - again, using perhaps the same two to five years - from the point of view that the bigger operators need to grow their profits before they can free themselves from their leveraged position. Operators in other sectors share this problem - they all need time to produce the multiple of profits and time for inflation, perhaps, to do its job to reduce their debt.'
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