Wren Investor Update€¦ · Portfolio Re-Brand After several years of evolving its offerings and...

1 Wren Investor Update 2017

Wren Investor Update April 2017


Contents

3 Overview

3 Update

4 Fund Re-Brand

10 Exit Opportunities

11 Current Portfolio Improvements

15 Benchmarks Against Industry

16 Forecasts

22 Non-Core Assets

22 Trading Performance Outlook

26 Portfolio Growth - New Acquisition Opportunities

29 Summary


Overview

Wren Retirement Fund is the new trading of The Montreux Care Home Fund (the

fund), which is a sub-fund of KMG SICAV-SIF and is managed by KMG Capital

Markets (the fund manager), a licensed AIFM per EU AIFM directive.

In accordance with its Investment Objective, the fund has invested in care home assets.

The fund and its manager retain expert advisors, consultants and other service providers,

towards realising maximum return to shareholders from the fund’s investments.

Update

This report highlights the impacts of recent changes in operational management, and current

and future development potential, which have been investigated and implemented by the fund

manager in recent months.

Recent developments notably include:

• Re-brand of the portfolio as Wren Retirement Living – a high-end bespoke care home

portfolio targeting a perceived market gap in the mid-size ‘home-from-home’ care

home asset sector

• Expenses for development of the new brand and associated marketing, including launch

events and new websites, are expected to realise returns for the fund

• Appointment of Healthcare Management Solutions (HCMS), the UK’s leading

provider of management and consultancy to the care home sector. This has

resulted in increasing the profitability of the portfolio as cost efficiencies and average

weekly bed fees have increased

• Exceptional losses following audit of the portfolio, which identified short term needs for

significant re-investment including maintenance, reorganization, recruitment and new

systems

• Downward pressure on valuations, including especially for some of the fund’s non-core

assets

• Review site by site of optimisation and development opportunities across the

portfolio to identify and deliver potential added value during 2017

• Disposal of remaining non-core assets being investigated with the aim of realising

profits and to add additional spending power for new core portfolio acquisitions

• Researching and identifying an active acquisition pipeline of potential new sites that

have inherent optimisation and added value opportunities to build the Wren

portfolio, brand value and target enhanced investor returns

• Fund NAV was down 9.7% (GBP) in December, mainly due to performance of non-

core assets and otherwise reflecting the abovementioned temporary factors. Cost

efficiencies and fee increases were becoming evidenced at 2016 year end but they were

yet to be established for the long term

• Management and cost efficiencies (excluding development uplift opportunities)

are forecast to uplift the portfolio net profit before tax (NPBT) from 9% of

income in 2016 to 17% in 2017 then rising to 21% by 2019

• Potential development identified of 14 additional rooms at 2 sites

• Additional rooms and new acquisitions forecast to further raise NPBT to 24% of

income by 2019, subject to planning

• Additional rooms estimated to add over £1 million to current property values


Portfolio Re-Brand

After several years of evolving its offerings and expanding business, the team

at KMG believed t h e C a r e H o m e F u n d branding did not reflect the

advancements the fund had made. Along with a more integrated and

collaborative portfolio management culture with the successful appointment of

Healthcare Management Solutions (HCMS), the fund believed it required the

creation of a brand that reflected its re-focus on the core high-end care home

portfolio offering.

The previous operational team was replaced with Healthcare Management

Solutions (HCMS) and, by implementing a synchronized re-launch, T h e

Montreux Care Home Fund publically rebranded itself to be “Wren Retirement

Fund.” The aim was to be able to better reflect the fund’s goals while

improving returns to investors through a re-invigorated and focused investment

approach and a strong improvement in delivery of day- to- day healthcare

management and corresponding improvements in occupancy, morale and culture.

Wren always had the goal of keeping its investments aligned on the acquisition

and improvement of underperforming care home facilities, targeting strong

investor returns from the fund’s core assets. In an ever-changing industry, the

previous fund advisors had recommended diversifying into a range of

opportunities in specialist care and new build development opportunities with a

view to helping the fund achieve its investment goals.

However, although these non-core investments could produce a good return, it

was felt that the fund faced an awareness challenge and the re -brand would

ass is t i n building the core care home offering, which presents opportunities for

increased potential future returns to investors with reduced risks.

A portfolio analysis by KMG and liaison w i t h the key investors h a s

identified the need to crystalise the non-core asset profit potential and focus on

purely optimising and then growing the c o r e care home portfolio. This

strategy, the fund and its advisors believe, will add the most value in future and

build a valuable asset brand (Wren) that will further enhance portfolio exit values.

To better reflect this focus a rebranding effort was put in place. HCMS were

therefore instructed to carry out an extensive internal review process to re-launch as

Wren Retirement Living. The rebranding effort also included creation of both

external client and investor websites and an internal brand launch to transform

The Montreux Care Home Fund into Wren Retirement Fund.

This transformation has helped to simplify what the Wren brand offers to its target

consumers and the value creation for investors.

Consequently Wren is now focused on building one of the strongest high-end UK

care brands in the UK mid-size, bespoke, care home asset class to ensure the

fund maximises opportunities for investor returns.


To highlight this exciting transformation in the fund’s direction, the Wren brand

was therefore successfully launched on the 17th November 2016 and the fund

hosted a brand launch day at each of its 5 core care home properties.

“We really had to look at how we could best deliver

costs efficiencies, add value within the current

portfolio and assess the opportunity for growth.

Bespoke high-end care homes is what the Wren

brand now epitomises” Paul Pavli of KMG says.


Click here to see

full version


Click here to see full

version

Concurrently the fund launched the new customer focused Wren website and

this was followed shortly thereafter with the launch of the investor focused

website in December 2017:


version


version


A more comprehensive version of the investor website, fully mobile and tablet

compatible, is targeted to be launched by the end of April 2017. Below are

images of the current draft:


Since the launching of Wren's new brand, the fund has attracted increased

attention from the market with a corresponding increase in potential acquisitions

being offered to the fund; more on these later.

The challenges of providing high-quality elderly residential care in a country

with an ageing population and stagnating government spending levels means

that an innovative response is needed. Despite substantial investment in new

and refurbished capacity in the independent sector over the last two decades, a

considerable amount of existing care home stock is still classed as ‘sub-standard’.

It is amongst this existing underperforming care home stock that the fund is now

seeing increased opportunities to acquire and further optimise period properties

that fit within the Wren brand. We will elaborate further on these opportunities

later in this report.

It is through a continued program of tight asset selection criteria,

refurbishment, adding additional rooms and profit through p l a n n i n g gain

and implementing management efficiencies, delivered through its collaboration

with HCMS, that the fund will aim to increase returns to investors during

2017 and beyond.

The target is to grow the portfolio to c25 care homes providing a premium

offering focused across the South East.

“There is great demand among relatively wealthy

individuals for the most prime care homes.

Operators who choose to run modern care homes

with the highest levels of service in great locations

can make very healthy profit levels”. Knight Frank Care

Home Trading Performance Review 2016.


Exit Opportunities

Market activity over the past two years has been very strong and fueled by the

arrival of new and very well-funded sources of capital in the form of US REITS,

hedge funds, special opportunity funds and other international investors. We

have also seen the return of UK Institutional investors and significant activity

from the private equity community. This positive wave of new liquidity has

filtered down to the regional market with the main UK banks also actively

lending again and supporting operators with proven track records to develop

and expand their businesses.

This provides opportunity for the fund to rapidly build a targeted portfolio of c25

bespoke care homes under the Wren brand with the dual options of either a

longer-term hold strategy or a future portfolio sale into this very active investor

sector.


Current Portfolio Improvements

Impact of collaboration with HCMS.

With a strong bias towards long-term management, HCMS’s modus operandi is to

introduce an effective system of management through which they can drive up

standards of client care whilst implementing cost savings through bulk purchase

arrangements as well as delivering efficiencies and so improve business

performance. They have a proven track record of turning under-performing

homes into high quality and commercially successful units.

The fund believes that sustained commercial success can only be achieved

through the delivery of high standards of quality care and consistent, effective

operational management.

Over the past 15 years the HCMS team has operated in excess of 500 homes and

carefully handled everything from resolving regulatory and contracting

difficulties arranging continuity of suppliers, book-keeping and monthly

management reporting, to recruitment and training of staff and implementation

of care quality and management systems.

Specific challenges were faced by HCMS when taking over the Wren portfolio.

These have been met head on in recent months with substantial activity in

reducing staffing costs, increasing average fees per resident and ensuring

operating costs per resident are improved in a challenging operating

environment.

These challenges have included the increase in the UK national minimum wage

introduced at the end of 2016 and the impact of Brexit negotiations on exchange

rates. The latter has a specific impact on food costs, which form approximately 6%

of current operating costs.

Working closely with the fund manager, HCMS’s experience, forward planning

and commitment to quality of care has played a key role in enabling the fund

to meet these challenges in a constructive way.


HCMS – Improvements Highlights

HCMS entered into a 3-year contract on behalf of Wren for electricity and

gas that is 14% cheaper for gas and 15% cheaper for electricity than historic

rates.

The use of agency staffing has been brought under control over the past year

reducing from a level of £50k per month in January/February 2016 to a

current rate of c £26k per month – a saving of £250-300k per annum – with

further savings expected.

By utilising HCMS suppliers and leveraging off HCMS’s purchasing power a

reduction in the spend on laundry and cleaning chemicals by c £30k p.a. across the

group has been achieved (average monthly spend in the 6 months to July 2016 was

£12.6k, average in the 6 months to Jan 2017 was £9.6k).

Repairs and maintenance spend has been exceptionally high within the group

over the past 12 months. This is primarily due to the introduction of a revised

property maintenance programme.

The last 12 month run rate is £1,772 maintenance cost per useable bed which

compares with between £1,000 and £1,200 per bed in a typical estate of this

age / quality.

Included within the £237k spent in 2016 since HCMS took over is approx

£30k of Fire Improvement works and £18k of works to repair rotten and

leaking roofs.

Such items of expenditure would not be expected to recur en masse

again, with a revised programme in place to ensure regular

maintenance.

Additional work to the car park and conservatory roof at Featherton and

exterior painting to Wren will be carried out once the weather improves –

obvious issues such as these impact on valuations as a valuer will discount

where it is evident that the building is in need of investment.

Other works include expenditure on carpets and furnishings and items such

as this that improve the living environment will assist in maintaining and

improving the average weekly fees and occupancy.


In summary the fund has therefore achieved (data provided by Care Portal,

HCMS):

1) Total staffing costs significantly below budget:

Total Staffing Costs

300k

280k

260k

240k

220k

Actual Budget

2) Staffing costs as a percentage of overall operating costs substantially below

budget, despite minimum wage increases, achieved primarily through close

monitoring of utilisation of (higher cost) external agency staff. Staff

retention is key here and HCMS has an extremely strong track record:

Total Staffing Costs Percentage

70%

65%

60%

55%

50%

Actual Budget


3) Operating profits are ahead of budget and projected to increase in 2017,

based on current number of beds alone i.e. ignoring potential additional

profits from adding additional beds:

Operating Profit

140k

120k

100k

80k

60k

40k

Actual Budget

4) Average fees per week are now increasing significantly as the

revitalised image of the Wren brand begins to take effect:

Total Average Fees Per Week

960

940

920

900

880

860

Actual Budget


5) Keeping food costs on budget has been achieved against a backdrop of

rising pricing following the fall in value of the pound post Brexit referendum,

achieved primarily through HCMS’s collective purchasing power:

Food Costs Per Resident Day

7

6.5

6

5.5

5

4.5

4

3.5

Actual Budget

6) Overall from a position at the start of 2016 when operating costs per

resident were ahead of budget, HCMS has helped the fund achieve significant

cost controls across the portfolio:

Operating Costs Per Resident Day

15

12.5

10

7.5

5

2.5

Actual Budget


Benchmarks Against Industry

Comparisons of performance against the Care Homes Performance Index 2015/16

(Knight Frank Research) by size of care home:

Less than 40 bed

care homes

Care Homes

Index Average

Wren Average

2016

Performance +/-

Occupancy Rates

90.0%

91.0%

+1.1%

Staff Costs

60.0%

56.7%

-5.5%

Average Weekly

Fees

£676

£902

+33.5%

Operating Profit

per Bed

£8,619

£10,022

+16%


Valuations

The external RICS valuer, Jones Lang LaSalle (JLL), carried out annual valuations at

2016 year end, in accordance with the fund’s offering document.

Valuations have declined, mainly due to reduction in non-core assets’ values

following trading information from third party operators. The fund manager is

reviewing potential exits for these non-core assets.

Core assets’ market values reduced by much lesser amounts, despite exceptional

losses arising from maintenance costs and other expenses that are not expected to

recur en masse.

The core assets’ December 2016 valuations reflect evidence of progress by HCMS

towards improving performance of the homes and JLL have reported future potential

to further improve performance and market values, without consideration of

opportunities identified for the addition of new rooms in some of the homes.

Highlights include:

Wren: Following a challenging two years in 2014 and 2015, occupancy

levels and fees have increased over the last year and profitability has returned

to historic levels.

Linden: Following a difficult three years further work is required to improve

the occupancy of the home which stood slightly increased in 2016. There is

also the potential to improve the average weekly fee with new admissions as

evidenced in the month of December compared to the average for 2016.

Westerham: The profitability of the home has improved and has potential to

improve further with an increasing average weekly fee and reducing levels of

staff costs.

Patcham: The key issue facing the home is the level of staff costs, which are

having a significant impact on profitability and must be addressed as a matter

of urgency. These now appear to be reducing and if the December 2016 level

can be sustained then the home should be able to deliver a significant

improvement in profitability.

Featherton: As at December 2016 occupancy had fallen after a number of

recent deaths. Our opinion of value reflects the recent fall in occupancy and

period required to improve trade back to our opinion of future maintainable

operating profit.


Forecasts

A) Optimisation and Development (Core Assets)

A detailed review process has taken place to consider the opportunities at all the

core properties for enhancing value through a programme of additional

development. The focus has been on assessing the potential of constructing

additional rooms as well as a re-arrangement of the current layouts where

possible.

Each site had to be subjected to a fully considered development potential planning

process to identify and consider:

• Which properties and/or land at those sites have potential for

development

• Assess these development opportunities wi th architects, planning

consultants and property advisors

• Assess their suitability for development and the likelihood of

successful planning applications (the availability and achievability)

• Conforming with the industry regulations on new build room sizes and

communal area provisions

• Assess impact on staffing/overhead costs in conjunction with HCMS

This approach ensures that all properties were assessed together as part of

c ombined plan to identify which sites are the most suitable and most likely to

deliver a profitable return on investment.

Analysis of the individual sites includes consideration of:

• Internal re-configuration within the confines of current floor plates

• Historical listings of buildings

• Scaling and massing

• Anticipated costs of re-development

• Timelines for development

• Gross development values

• Likelihood of achieving consent for planning

This has proved a time consuming exercise as each property has had to be visited

by architects and the advisory team, current accurate floor plans drawn up,

consideration of the elements listed above and then architects plans drawn of

potential new plans/re-development opportunities and planning consultants

opinion sought.


We are pleased to report that significant progress on this project has been

achieved in recent months and we are able to summarise as follows:

Patcham

Two areas of improvement and development identified. Firstly, the

reconfiguration of the kitchen, laundry and rear office to move them under the

under croft carport/refuse area in order to provide space for additional rooms.

Secondly the addition of an extension to the western end of the home.

The two ‘extensions’ are subject to planning consent.

Considering current cost estimates the uplift in value after costs has been

appraised to be £353k when completed and occupied.

Computer Generated images of the revised facades post-


Westerham

Two areas of potential development have been identified one on the end of the

existing extension to the property, four bedrooms, and one area to the side of

the conservatory again to house four bedrooms.

Following further due diligence and legal report from the lawyers, a new

application submission will be made to the local planning authority.

Subject to a favourable planning report and considering current cost

estimates the uplift in value after costs should be £163k when completed and

occupied.


Wren

A full review identified 3 opportunities of uplift which are all being investigated.

• Development – Potential addition of rooms at rear and behind the coach

house. Initial advice has been that planning may well be difficult to obtain

given the Grade 2 listing of the original parts of the property. A pre-

application is imminent to the local planning authority to clarify feasibility.

• Second option is a light refurbishment of the coach house and then renting

the two vacant floors on the open market to generate c£14,500 per annum

gross income or alternatively an open market sale.

• Additional uplift from the sale of the ground rent investment to the rear of

the care home can take place in late Spring 2017. Expected sale value of

c£35k.


Linden House

A full market report has been commissioned from HCMS to identify the demand

in the area in order to ascertain whether current utilised bed numbers can be

improved and therefore if sufficient capacity exists in the market to warrant

further potential expansion, subject to planning.

Featherton House

The opportunity for expansion here is again potentially limited due to the Grade 2

listing and layout constraints of the main building. Plans have been drawn up for

additional rooms but this would form phase 2 of any development programme

due to the considerable planning issues.


Optimisation and Development summary

Having taken into consideration the risk/achievability profiles of t h e various

planning opportunities, focus is currently on Patcham and Westerham as

providing most achievable planning gains in the short term.

We have therefore modeled the financial impact of the 14 potential additional

rooms at Patcham and Westerham being delivered, subject to planning, whilst

currently ignoring any further potential gains that might be achieved at the other

portfolio properties.

The net impact, including HCMS efficiencies, is a combined additional uplift

in NPBT for the Wren core portfolio from 9% in 2016 to 24% in 2019.


Non-Core Assets

London Road

Opportunities are being explored for either a potential sale of the site as either a

care home development or residential development. Expressions of interest have

been received from several parties and the fund anticipates a resolution in the next

few months.

Hartlepool

This consists of a supported living investment. The fund is reviewing potential exits

on this non-core asset. Resolution is expected in the next few months.

Willowmead

This is another supported living investment and hence considered to be a

non-core asset. The fund is exploring exit opportunities that c o u l d return cash to

the fund, which would then be utilised for future acquisitions of core care home

assets.

Trading Performance Outlook

A full review has been conducted of current portfolio profitability and future profit

growth forecasting in conjunction with data supplied by HCMS. This is

summarised below in two sections.

Firstly examining the forecast uplift from the current portfolio as a result of

the impacts of the ongoing management and cost efficiencies currently being

delivered by HCMS.

Secondly examining the additional impacts of the development opportunities

identified above.

As is clearly demonstrated by the figures in the tables below, the

management improvements under the new regime are targeted to deliver

e x c e l l e n t growth in NPBT topping 21% by 2019, with an upward target of

24% subject to the development programme.


A) Current Core Portfolio - Trading Results Forecast

Wren Homes - Trading results and forecast to 2019

2016 2017 2018 2019

Total no. Beds 129 129 129 129

Projected Occupancy 114 120 120 120

% Occupancy 88% 93% 93% 93%

Income

5,321,630

5,819,486

6,141,329

6,509,550

Total costs 4,860,396 4,828,692 4,981,252 5,122,281

Net Profit Before tax 461,234 990,794 1,160,077 1,387,268

Average weekly room rate

£949

£960

£1,018

£1,079

NPBT % Core Care Homes 9% 17% 19% 21%


B) Optimisation/Development of Core Portfolio - Trading Results Forecast

Wren Homes - Trading results and forecast to 2019, including additional 1 4

rooms at Patcham (10 additional rooms) and Westerham (4 additional rooms) -

build is complete at Patcham and Westerham in 2018. It also assumes that one

n e w pipeline property is acquired in 2017 with 35 rooms and one new pipeline

property is acquired in 2018 with 21 rooms. .

Note these figures exclude potential for new rooms at newly acquired care

homes.

2016 2017 2018 2019

Total no. Beds 129 164 199 199

Projected Occupancy 114 149 185 185

% Occupancy 88% 91% 93% 93%

Income

5,321,630

7,000,250

8,336,775

8,715,183

Total costs 4,860,396 5,714,265 6,532,125 6,612,386

Forecast net profit from current core 461,234 1,285,985 1,804,649 2,102,797

care homes

Average weekly room rate

£949

£930

£938

£982

NPBT % Core Care Homes 9% 18% 22% 24%


Portfolio Growth – New Acquisition

Opportunities

The fund has been approaching the market to ascertain opportunities for new

acquisitions to add to the portfolio. The re-brand as Wren has attracted

attention and a strong pipeline has now been identified.

The fund currently has c£6m of cash available for such acquisitions and is also

reviewing the current debt finance position and is exploring the opportunity to re-

finance to enhance geared returns.

Based on the niche market opportunity Wren has identified, the core acquisition

criteria are:

• Geographic area, London, the South East of England and Home

Counties and Midlands.

• Quality locations

• Mid-size care homes with 20-35 rooms

• Potential to extend and/or re-configure

• Period and character properties

• Local demographics support demand profile

• Opportunities to implement cost/management efficiencies

• £1.5m-£3m with average weekly fee of £650-£800, £0.2m-£0.4m EBITDA and 12%-16% yield

In total more than £20m of assets has been reviewed in order to identify the best

potential acquisition opportunities. Further due diligence on these properties is being

carried out, utilising the expertise of expert consultants.


Summary

2016 was a year of consolidation, assessment and improvement for the fund.

The re-brand to Wren has proven to have been highly successful and

implementation of the cost/management efficiencies that had been identified,

primarily through HCMS, are set to drive forecasted growth in income and

profitability significantly over 2017 (NPBT 17%) and through to 2019 (NPBT 21%).

The development and proposed acquisition programme is forecast to deliver a

further increase of NPBT to 18% in 2017 and to 24% by 2019.

It should be noted that these figures exclude any further uplift that may be

available from the inherent development potential for additional rooms at the

proposed new acquisition sites.

Wren Retirement Living is therefore, with the continued support of investors, now

in the enviable position of being able to target superior returns through a

combination of:

• Portfolio efficiencies delivered by a best in class advisory team

• Enhanced returns though deliver of development gains

• Cash available to expand its portfolio and so target superior returns to

investors in the coming years


Disclaimer

Wren Retirement Fund, formerly The Montreux Care Home Fund, is a Dedicated Fund of KMG SICAV–SIF (the “Company”

or the “Fund”), a Luxembourg-registered “Société d’Investissement à Capital Variable” authorised and regulated by the

Luxembourg regulator, the Commission de Surveillance du Secteur Financier (“CSSF”), governed by the Law of 13th

February 2007 and qualified as an Alternative Investment Fund (“AIF”) of the specialised investment funds type, managed

by KMG Capital Markets Ltd (“KMG”), an external Alternative Investment Fund Manager (“AIFM”), established in the

Republic of Cyprus, in accordance with Chapter II of Directive 2011/61/EU of the European Parliament and of the Council

of 8 June 2011 on Alternative Investment Fund Managers (“AIFMD”) and regulated by the Cyprus Securities and Exchange

Commission (‘CySEC’). By accessing this information you shall be deemed to accept and agree to be bound by the terms of

this notice. This communication is directed only at institutional investors, professional investors and other well-informed

investors. It should not be distributed to, or relied on by, any other investors. The Fund cannot be promoted to investors for

whom it has not been deemed appropriate. If you do not fall into these categories do not read this document. The information

contained herein is confidential and is intended only for the persons to whom it is transmitted by the company or

authorised distributors. Any reproduction of this document in whole or in part, or the divulgence of any of its contents,

without the prior written consent of the Fund or the AIFM, is prohibited. Any information that is specific in article 23(1)

of the AIFMD, will be delivered by the AIFM to potential investors upon request, before they invest in the Dedicated Fund.

This information is not directed at you if we are prohibited by any law of any jurisdiction from making the information in

this document available to you and is not intended for any use that would be contrary to local law and/or regulation. This

document and its contents are only intended to provide general information about Wren Retirement Living to “well-

informed, institutional/professional” investors as specific in Directive 2011/61/EU of the European Parliament (“AIFMD”).

Neither we nor any third parties provide warranty or guarantee as to the completeness, timelines, or adequacy of the

information provided herewith. Past performance of any investment is not always indicative of future performance and

investments are subject to many risk factors. The value of Wren Retirement Fund and its share classes are calculated

without taking into account any placement or redemption fees and assuming constant reinvestments of dividends. The use

of any information or materials in this document is entirely at your own risk, for which we expressly exclude liability to the

fullest extent permitted by law. It shall be your own responsibility to ensure that any products, services or information

available through this document meet your specific requirements. Nothing in this document should be regarded as an offer or

solicitation to conduct investment business or buy or sell any investment products, nor does it constitute any form of personal

recommendation. This document does not constitute legal advice and is merely intended to raise awareness of issues relating

to Wren Retirement Fund. We shall not incur liability of any kind should this document be used as a basis for responding to

legal questions.

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