valuation report - caretech-uk.com/media/files/c/caretech-uk/... · 2018-09-19 · valuation report...

Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Our registered office is 55 Baker Street, London, W1U 8AN where you may look at a list of members’ names.

Valuation Report

Cambian Group PLC Portfolio

Prepared on behalf of CareTech Holdings PLC &

Panmure Gordon (UK) Limited

Date of issue: 19 September 2018

Contact details

CareTech Holdings PLC & Panmure Gordon (UK) Limited, Metropolitan House, 5th Floor, 3 Darkes Lane,

Potters Bar

Michael Hill

Knight Frank LLP, 55 Baker Street, London W1U 8AN

Patrick Evans, 020 7861 1757, [email protected]

KF ref: I:1061510

Valuation Report │ Cambian Group PLC Portfolio │KF Ref: I:1061510 Page 3 Prepared on behalf of CareTech Holdings PLC & Panmure Gordon (UK) Limited │ Date of issue: 19 September 2018

Executive summary

The executive summary below is to be used in conjunction with the valuation report to which it forms part and is

subject to the assumptions, caveats and bases of valuation stated herein and should not be read in isolation.

Portfolio Cambian Group PLC Portfolio.

Description The portfolio comprises the Cambian Group PLC portfolio of children’s homes, SEN

schools, other associated care facilities and vacant properties. The portfolio comprises the

following:

● 224 properties comprising:

● 153 freehold properties (152 owner occupied, one tenanted)

● 12 Long Leasehold properties

● 59 Leasehold properties

Tenure Properties are owned freehold, long leasehold or leasehold.

Valuation

considerations

● Properties have been valued as a portfolio.

● The portfolio would be sold as single lot.

● The portfolio valuation incorporates head office costs necessary to manage a portfolio

of this scale and a portfolio premium.

● Trading properties are valued as fully equipped operational entities having regard to

trading potential.

● Closed properties are valued assuming the business is closed and the property vacant

within existing use

● The portfolio value reported includes a portfolio premium which we believe would be

achievable on a portfolio of this scale and quality as at the date of valuation.

Valuation date 19 September 2018

Valuation

summary

Fair Maintainable Trade set at stabilised level for each trading property

The following Multiplier have been applied to arrive at the Market Values:

● Portfolio: 11.97x FMT EBITDA

Valuation Portfolio Market Value: £350,000,000

Property Risks ● The Market Value of the properties as a Portfolio differs significantly from the value of

the properties if they were sold as individual assets.

Executive summary cont.


● A portfolio valuation includes an allowance for a premium or discount over the

aggregate individual values.

● Premiums and discounts have historically been transient and dependent upon a

number of cyclical factors, both at a micro and macro level, as well as motives of both

parties to a transaction.

● We have applied a premium over the aggregate values of the properties in the event

they were to be sold on an individual basis in an orderly process, without flooding the

market.

● Our portfolio valuation includes a management overhead of circa £30 million in our fair

maintainable trade, a reduction on the FY18 forecast overheads of circa. £34million.

This has been arrived at based on synergies for the purchaser and after considering

analysis by other due diligence providers around the true overhead costs of the group

on which we have relied.

● We strongly suggest that your legal advisers confirm that our understanding of any legal

matters is correct.

● The properties operate in a market which is subject to regulation. The necessity to

retain the relevant registrations and maintain the quality of provision is of paramount

importance in protecting the values reported herein.

● The National Living Wage (“NLW”) will increase with the aim of a rate of £9.00 per hour

by 2020. It is likely that to retain high calibre staff members, increases in pay rates will

need to track or even exceed the inflationary growth in NLW, particularly in more

affluent locations.

● Following the Referendum held on 23 June 2016 concerning the UK’s membership of

the EU, a decision was taken to leave. We bring to your attention the important

comments in the Property Risk section of this report.


Contents

Executive summary 3

1 Instructions 6

Engagement of Knight Frank LLP 6 Scope of enquiries & investigations 9 Valuation bases 10

2 The Properties 11

Summary 11 Services 11

Legal title 12

Tenancies 12 Condition 12 Environmental considerations 13 Sustainability 14

Statutory Matters 15

3 Valuation 16

Methodology 16 Comparable evidence 19 Valuation considerations 19

Valuation bases 19 Valuation date 19

Market Value 19

4 Property risk analysis 21

General comments 21 Risks relating to the property 21 Income risks 22

Economic & property market risks 22 Valuation risks 23

Risks relating to the terms of the instruction 23

Valuation Report │ Cambian Group PLC Portfolio │KF Ref: I:1061510 Prepared on behalf of CareTech Holdings PLC & Panmure Gordon (UK) Limited │ Date of issue: 19 September 2018

1 Instructions

Engagement of Knight Frank LLP

Instructions

1.1 We refer to our Terms of Engagement letter and General Terms of Business for

Valuations dated 9 August 2018, and the variation to the terms, by email, dated 14

September 2018 to provide a valuation report on the Cambian Group PLC Portfolio

(“the properties”).

1.2 The addresses of registered children’s homes are not made publically available for

security purposes. As a result we have been instructed not to include a list of the

properties valued.

Client 1.3 Our client for this instruction is CareTech Holdings PLC and Panmure Gordon (UK)

Limited (“the Client”).

Valuation

standards

1.4 This valuation has been undertaken in accordance with RICS Valuation – Global

Standards 2017, incorporating the International Valuations Standards, and RICS

Professional Standards UK January 2014 (revised April 2015). References to “the

Red Book” refer to either or both of these documents, as applicable.

Purpose of

valuation

1.5 The Valuation is provided solely for the purpose of the inclusion of the Valuation

within the prospectus to be prepared in connection with the revised offer for Cambian

Group PLC and the proposed re-admission of CareTech Holdings PLC’s shares to

trading on AIM and in accordance with clause 4.1 of our General Terms may not be

used for any other purpose without our express written consent.

Conflict of

interest

1.6 We confirm that we do have a material connection or involvement giving rise to a

potential conflict of interest, as set out below:

● We valued those Properties then owned by Cambian Group PLC as at 3 March

2014 for inclusion within the approved prospectus for the Cambian Group PLC's

initial public offering of shares on the Official List of the UK Listing Authority.

● We have valued a single school and a portfolio of 91 properties formerly owned

by Cambian Group PLC which does not form part of the subject portfolio in the

last 24 months for internal purposes or for inclusion in Cambian Group PLC's

financial statements.

● Subsequent to this instruction we are carrying out a valuation of 70 of the

properties within the subject portfolio on behalf of National Westminster Bank

PLC, NatWest Markets PLC and Lloyds Bank PLC for secured lending purposes.

1.7 We have previously disclosed this to you and you have confirmed that

notwithstanding this matter, you are content for us to proceed with this instruction.

We are providing an objective and unbiased valuation.

1.8 We are acting as External Valuers as defined in the Red Book. Book (independent

experts for the purposes of paragraph 130 of the European Securities and Market

Authority’s (“ESMA”) update of the CESR recommendations for the consistent


implementation of Commission Regulation (EC) No. 809/2004 implementing the

Prospectus Directive (the "ESMA Recommendations"), qualified for the purpose of

the valuation.

Responsibility

to third parties

1.9 For the purposes of Prospectus Rule 5.5.3(R)(2)(f), we are responsible for this

Valuation Report and accept responsibility for the information contained in this

Valuation Report and confirm that to the best of our knowledge (having taken all

reasonable care to ensure that such is the case), the information contained in this

Valuation Report is in accordance with the facts and contains no omissions likely to

affect its import. This Valuation Report complies with Rule 5.6.5G of the Prospectus

Rules and paragraphs 128 to 130 of CESR's recommendations for the consistent

implementation of the European Commission's Regulation on Prospectuses no.

809/2004. We are advised by Cambian that that they hold Properties on the balance

sheet at net book value. In accordance with our terms of engagement, and as set out

above, our opinion of Market Value is based on the hypothetical sale of the

Properties, sold as a single portfolio and with reference to the RICS Red Book. It

would not be appropriate or possible to compare such a valuation to one for accounts

purposes, which was prepared by others, and which are, we are advised, prepared in

accordance with accounting rules adopted by Cambian and which is carried out at an

individual property level and not as a portfolio.

Disclosure &

publication

1.10 Clauses 4.3 to 4.6 of the General Terms limit disclosure and generally prohibit

publication of the Valuation. As stated therein, the Valuation is confidential to the

Client and neither the whole, nor any part, of the Valuation nor any reference thereto

may be included in any published document, circular or statement, nor published in

any way, without our prior written consent and written approval of the form or context

in which it may appear. Notwithstanding this, the Valuation may be disclosed as set

out below:

Notwithstanding Clause 4.1 of our General Terms of Business for Valuations, we

confirm that we will consent to the Valuation and/or a summary of the Valuation

being disclosed in a prospectus issued for the Purpose as set out below:

The Valuation is capable of being disclosed by the Client (and in the case of (ii) to (v)

on a non-reliance basis only):

(i) if the report is publicly available or if any part is publicly available, only that part

which is publicly available, in each case other than as a result of a breach by

you of this provision;

(ii) in connection with any actual or potential legal or arbitration proceedings;

(iii) if requested or required by law or regulation or by any court of competent

jurisdiction;

(iv) to any competent judicial, governmental, banking, taxation or other regulatory

authority or supervisory body; and

(v) to or pursuant to the rules of any stock exchange or listing authority or similar

body.


It is a condition of such disclosure that each party in receipt of the report agrees and

acknowledges that the Valuation cannot be relied upon by them, and we do not

accept any responsibility, duty of care or liability to them, whether in contract, tort

(including negligence), misrepresentation or otherwise in respect of the Valuation

and the information it contains.

In addition you (for yourself and on behalf of those other parties to whom reliance is

given in respect of the Valuation) agree that the Aggregate Limit shall be the

aggregate limit in respect of the Valuer’s liability to those parties in respect of the

Valuation under this Letter and the Valuer’s liability to National Westminster Bank plc

and Lloyds Bank Plc (and any other parties to whom reliance on the lenders'

valuation report is permitted) in respect of the valuation report for the Properties to be

carried out by the Valuer in accordance with a letter of engagement from National

Westminster Bank plc to the Valuer dated 9 August 2018. It is agreed that in no

event shall the Valuer’s aggregate liability in respect of its valuations carried out in

connection with the proposed offer for the shares in Cambian Group PLC, whether in

respect of the valuation report given to you as offeror or to National Westminster

Bank plc and Lloyds Bank Plc as lenders, exceed the Aggregate Limit.

Limitations on

liability

1.11 No claim arising out of or in connection with this valuation report may be brought

against any member, employee, partner or consultant of Knight Frank LLP. Those

individuals will not have a personal duty of care to any party and any claim for losses

must be brought against Knight Frank LLP.

1.12 Knight Frank LLP’s total liability for any direct loss or damage caused by negligence

or breach of contract in relation to this instruction and valuation report is limited to the

amount specified in the Terms of Engagement letter, a copy of which is attached.

We do not accept liability for any indirect or consequential loss (such as loss of

profits).

1.13 The above provisions shall not exclude or limit our liability in respect of fraud or for

death or personal injury caused by our negligence or for any other liability to the

extent that such liability may not be excluded or limited as a matter of law.

Responsibility

for the valuation

and expertise

1.14 In accordance with VPS3 of the Red Book and Rule 29 of the City Code on

Takeovers and Mergers, the valuer, on behalf of Knight Frank LLP, with the

responsibility for this report is Patrick Evans MRICS, RICS Registered Valuer. Parts

of this valuation have been undertaken by additional valuers as listed on our file. We

confirm that the valuer and additional valuers meet the requirements of the Red

Book, having sufficient current knowledge of the particular market and the skills and

understanding to undertake the valuation competently.

Regulated

Purpose

valuations

(RPVs)

1.15 This valuation is a Regulated Purpose Valuation within the meaning of the Red Book,

which requires us to make the following disclosures:

● In relation to Knight Frank’s preceding financial year, the total fees to be paid by

the Client, as a percentage of the total fee income of Knight Frank, is less than

5%.


Vetting 1.16 This report has been vetted as part of Knight Frank LLP’s quality assurance

procedures.

Scope of enquiries & investigations

Inspection 1.17 You have instructed us to undertake a restricted service, namely:

We were instructed to only inspect a representative sample of the properties. We

have therefore carried out an internal and external inspection of 70 of the properties

held within the portfolio. Our inspection of the properties was undertaken between 28

August and 3 September 2018. The properties that we have inspected are a

combination of those which have been added to the Cambian Group PLC portfolio

since our valuation as at 3 March 2014 for the purpose of the IPO, and others which

we consider appropriate to ensure that we carry out an inspection of a representative

sample of the properties.

Desktop 1.18 The remaining properties have been valued on a desktop basis, i.e. without re-

inspection. These properties, excluding a number of new leasehold properties, have

previously been inspected by Knight Frank, most recently as part of the 2014

Valuation. As required under VPS2 of the Red Book, we have therefore valued these

on the assumption that they remain in the same condition as at the previous

inspection and that there have been no material physical changes to the properties

or to the nature of the surrounding areas since the date of the last inspection. This

has been confirmed by the management of Cambian and we have relied upon this in

undertaking the valuation.

Restrictions on

inspections

1.19 A small number of properties were inspected externally only as no internal access

was possible at the time.

NB 1.20 You should note that the desktop nature of a large portion of the valuation

significantly limits the extent to which reliance can be placed upon this valuation

report. However, the properties inspected include over half the bed/place numbers

and over or close to 50% of the income and EBITDARM of the portfolio historically,

currently and in future projections. The table below shows these ratios:

Year No of beds Income EBITDARM

FY2017A 53.8% 52.1% 50.7%

YT May 2018A 53.5% 50.7% 47.5%

FY2018F 54.1% 50.7% 47.2%

FY2019B 54.0% 52.2% 51.8%

FY2020B 54.0% 52.4% 52.8%

KF FMT 54.2% 52.4% 51.5%


Investigations 1.21 The extent of enquiries/investigations made is set out in our Terms of Engagement

letter. In carrying out this instruction we have undertaken verbal / web based

enquiries referred to in the relevant sections of this report. We have relied upon this

information as being accurate and complete.

1.22 In summary we are required to state:

● The nature and source of information relied upon in the valuation

● The steps taken to verify that information

Where information provided by the client, or another party, has not been verified, this

is to be stated, together with any comments made to us by those parties in relation to

the information.

Information

provided

1.23 In this report we have been provided with information by the Client, its advisors and

other third parties. We have relied upon this information as being materially correct

in all aspects

1.24 In particular, we detail the following:

● Information relating to the addresses of the properties

● Financial Model Cambian v151

● Financial Information Memorandum

● Site by Site location v.06 – Aug

● Ofsted Inspection reports (if available on site or through Ofsted online database

www.gov.uk/government/organisations/ofsted)

● Ofsted registration certificates (if available on site)

● CQC Inspection reports sourced from www.cqc.org.uk

● Lease documentation for the leasehold properties provided via the data room

● Other external due diligence reports prepared in connection with the Transaction

Valuation bases

1.25 In accordance with your instructions, we have provided opinions of value on the

following bases:-

Market Value

(MV)

1.26 The properties have been valued to Market Value in accordance with the RICS

Valuation Professional Standards VPS4 paragraph 1.2, relevant provisions of the

Listing Rules and Prospectus Rules issued by the Financial Conduct Authority, Rule

29 of the City Code on Takeovers and Mergers and CESR’s recommendations for

the consistent implementation of the European Commission’s Regulation on

Prospectuses No 809/204 and EU-Directive 2003/71/EC. Market Value is defined

within the standards as:

“The estimated amount for which an asset or liability should exchange on the

valuation date between a willing buyer and a willing seller in an arm’s length

transaction after proper marketing and where the parties had each acted

knowledgeably, prudently and without compulsion.”


Portfolio 1.27 The properties have been valued on the basis that they are sold as a portfolio in a

single lot.

Valuation Date 1.28 The valuation date is 19 September 2018.

2 The Properties

Summary

2.1 The portfolio comprises properties predominantly consisting of children’s homes

(“RCH”) and SEN schools and education facilities (“SCH”). There are also a small

number of other properties including unregistered step down or supported living units

(“SL”), an independent hospital (“IH”), care homes for adults 18-65 (“CH”) and

properties which are closed. The property type split by tenure is set out in the table

below:

Services

2.2 In accordance with the General Terms of Business, no tests have been undertaken

on any of the services. We have assumed for the purposes of valuation that mains

services of gas, electricity and water are provided to the properties or that oil or

tanked gas supplies are in place. Furthermore, we have assumed that the properties

are connected to mains drainage or have operational private drainage systems in

place.

2.3 Our valuation assumes that the services provided are sufficient for the continued

operation of the businesses carried out at the properties. Should this not be the case

then the values reported herein may be adversely impacted.

2.4 We have assumed for the purpose of valuation that other services such as lifts, fire

alarms and ventilation systems are present where necessary, are in working order

and of sufficient quality to meet regulatory and statutory requirements.

Type Freehold Long Leasehold

Leasehold

Total

RCH 113 12 43 168

SCH 26 - 12 38

IH 1 - - 1

RCH/CH 1 - - 1

CH 3 - - 3

SL 2 - 1 3

CLOSED 7 - 3 10

Total 153 12 59 224


Legal title

Land register

searches

2.5 As stated in our Terms of Engagement, we do not undertake searches or inspections

of any kind (including web based searches) for title or price paid information in any

publicly available land registers, including the Land Registry for England & Wales,

Registers of Scotland and Land & Property Services in Northern Ireland.

Sources of

Information

2.6 We have not been provided with any Land Registry entries or Title documents.

2.7 In our valuation, we have assumed a good and marketable title and that all

documentation is satisfactorily drawn.

Covenants 2.8 Unless otherwise informed we have assumed that the properties are not subject to

any unusual or onerous covenants, restrictions, encumbrances or outgoings. We

recommend that your legal advisers are instructed to investigate this matter further.

Rights of way 2.9 Unless otherwise informed we have assumed that there are no rights of way,

wayleaves or easements over the properties which may potentially have a

detrimental impact upon the valuations in this report. Where we have been advised

of a right of way or suspect this to be the case, this has been considered within our

valuation.

Tenancies

Owner occupied

properties

2.10 We are not aware of any staff occupation of the property and nor are we aware of

any occupancy restriction or similar limitation affecting the properties.

Lease

agreements

2.11 We have been provided with the tenancy information by the Client and have relied on

that information being correct. No additional verification has been undertaken. We

have seen a copy of the occupational leases for 52 of the occupational leases but no

head leases.

NB 2.12 A number of leases are holding over and are therefore valued at Nil due to the lack of

continuing property interest. A number of missing leases are valued at Nil when

potentially they could be liabilities depending on the terms of the tenancy. Further

comment is made in section 4 following.

Condition

Scope of

inspection

2.13 We have not undertaken a building or site survey of the properties.

Comments 2.14 We have assumed that the properties are in sound order and free from structural

faults, rot, infestation or other defects, and that the services are in a satisfactory

condition.

Summary 2.15 Those properties inspected were in general in good or reasonable decorative

condition commensurate with their age and uses. A number of properties were in

excellent condition having been recently refurbished throughout.


Desktop

assumptions on

condition

2.16 We have valued the properties on the assumption that they remain in a similar

physical condition and layout as at our last inspection in 2014. In the event there

have been material changes to the properties or the nature of the surrounding area

they may be an impact on the values reported herein.

Ground

conditions

2.17 We have not been provided with a copy of a ground condition report for the sites.

We have assumed that there are no adverse ground or soil conditions and that the

load bearing qualities of the site are sufficient to support the buildings constructed or

being constructed thereon.

Environmental considerations

Mining 2.18 A number of properties are situated in an area within which historic or current mining

is suspected. Our valuation assumes that these properties are not affected by such

mining, but, in the event that a mining survey (or equivalent) reveals an adverse

position, our valuation could be materially affected.

Flooding 2.19 We have used the website of the Environment Agency’s Indicative Floodplain Maps

to provide a general overview of lands in natural floodplains and therefore potentially

at “Risk of flooding from rivers or the sea”. The maps use the best information

currently available, based on historical flood records and geographical models. They

indicate where flooding from rivers, streams, watercourses or the sea is possible.

The website also indicates whether a property is in a location which benefits from

flood defences.

Contamination 2.20 Investigations into environmental matters would usually be commissioned from

suitably qualified environmental specialists. Knight Frank LLP is not qualified to

undertake scientific investigations of sites or buildings to establish the existence or

otherwise of any environmental contamination, nor do we undertake searches of

public archives to seek evidence of past activities which might identify potential for

contamination.

2.21 Subject to the above, while carrying out our valuation inspection, we have not been

made aware of any uses conducted at the subject property that would give cause for

concern as to possible environmental contamination. Our valuation is provided on

the assumption that the property is unaffected.

Radon 2.22 It is not possible in the course of our inspection/survey to determine whether radon

gas is present in any building, as the gas is colourless and odourless. Tests can be

carried out to assess the level of radon in a building and the minimum testing period

is three months. Where radon gas is discovered, it has been the experience of the

Health Protection Agency that it is not expensive, in proportion to the value of the

property, to effect the recommended remedial measures. We have therefore

disregarded this issue in terms of our valuation.

High voltage

equipment

2.23 There is high voltage electrical supply equipment close to a number of properties.

The possible effects of electric and magnetic fields have been the subject of media

coverage, with the result that where there is high-voltage electrical supply equipment

close to the property, there is a risk that public perception may affect marketability


and value. Further comment to be added if value considered to be affected in this

case.

Japanese

knotweed

2.24 During the course of our inspection we did not note the presence of Japanese

Knotweed on the site. It is an offence under the Wildlife & Countryside Act 1981 to

allow Japanese Knotweed to grow in the wild. The plant is an aggressive species,

which can crack and break through masonry, brickwork and service media.

Asbestos 2.25 Since 1999, the use within a building of asbestos containing materials (ACMs) has

been banned. These are commonly found although are often in areas not visible

from an inspection of the surface elements. While these can be sealed in place,

public alarm is such that their removal and safe disposal is the more likely course of

action and this can be particularly expensive. Removal and disposal will require

specialist advice. Knight Frank LLP does not specifically inspect for ACMs. Our

valuation assumes that no ACMs are contained within the properties unless noted on

inspection or informed by the CCC. In those properties where asbestos is present we

have assumed that the property owner is meeting his statutory obligations and there

is no adverse effect on value.

Sustainability

Sustainability 2.26 The issue of sustainability is becoming increasingly important to participants in the

property market. There is a general expectation that buildings that minimise

environmental impact through all parts of the building life cycle and focus on

improved health for their occupiers may retain value over a longer term than those

that do not.

2.27 The Government has set itself a target to reduce CO2 emissions by 80% by 2050.

With property representing around 50% of total emissions, the sector has become an

obvious target for legislation. It is likely that, as we move towards 2050, energy

efficiency legislation for property will become increasingly stringent.

EPCs 2.28 All properties within the UK require an Energy Performance Certificate (EPC) when

bought, sold, built or rented. An EPC measures the asset rating of a building in

relation to its energy performance.

2.29 The Energy Efficiency (Private Rented Property) (England and Wales) Regulations

2015, more commonly known as Minimum Energy Efficiency Standards (MEES),

introduces legislation which means that, with effect from 1 April 2018 commercial or

domestic premises which falls beneath an “F or G” energy efficiency rating, it will

become unlawful for them to be leased without energy efficiency improvements

having been made (subject to a number of exclusions and provisos). From 1 April

2023, these regulations will also apply to current leased premises as well as new

lettings (subject to a number of exclusions and provisos). Furthermore, it is

conceivable that the minimum energy efficiency rating could be increased to further

increase energy efficiency standards in property.


2.30 We have searched the national EPC register for each property and where available

have had sight of the relevant document.

2.31 From a value perspective, sustainability is likely to be a long term issue and its

relative importance will change over time. Our valuation provides our opinion of

value at the valuation date based on market related factors at that date.

Statutory Matters

Sources of

planning

information

2.32 We have been advised that there are no material planning applications outstanding

by Cambian. We have endeavoured to confirm this information with the relevant local

authority via their websites.

2.33 These enquiries should not be taken as personal searches and information on the

relevant website is assumed to be both accurate and up to date. For a formal

planning enquiry to be made, the planning authority will require written representation

which has not been possible as part of our report.

Highways 2.34 We have not made enquiries of the relevant Highways Authority.

2.35 On the grant of planning permission there is a statutory period of 6 weeks within

which an “interested” party can apply, on a point of law only, for a Judicial Review of

the decision to grant permission.

2.36 We have assumed that there are no current highway proposals in the immediate

vicinity likely to have a detrimental effect upon the properties within the foreseeable

future. Furthermore unless otherwise informed we have assumed that all highways

bounding the property are adopted.

Access 2.37 In reporting our opinion of value, we have assumed that there are no third party

interests between the boundaries of the subject properties and the adopted highways

and that accordingly the properties have unfettered vehicular and pedestrian access.

Council Tax &

Business Rates

2.38 Children’s homes are liable for Council Tax and schools are liable for business rates.

We have researched the relevant obligations of the properties and in all cases we

have assumed that the relevant liability has been met by the operator.

Registration 2.39 The portfolio comprises registered businesses. The regulatory bodies are

responsible as follows:

● Ofsted (England) (children and schools)

● CQC (England) (Adults 18-65)

● Care Inspectorate Wales

We have not been provided with copies of the registration certificates for each

property despite requesting but have had sight of these in the trading homes and

schools at inspection in most cases and have confirmed registration via the

information provided.


Review of

Compliance

2.40 Registered care facilities are inspected by the relevant regulator and graded on

compliance. The most recent compliance review has been considered within our

valuation where made available to us.

Fire safety 2.41 It is a requirement for a fire safety risk assessment to be carried out and for a fire

management plan to be maintained. These requirements, which were introduced in

2006 replace the previous requirement for a Fire Certificate.

2.42 We have not viewed any such documents relating to the properties and have

assumed for the purposes of our valuation that the relevant requirements have been

fully complied with.

Access for

disabled

persons

2.43 Disability discrimination legislation provides that the majority of organisations must

make provision for disabled persons to have access to the goods and services they

provide. This may require an access audit of the property to be undertaken and for

specific arrangements relating to physical aspects of the building. We have not been

provided with any information in this respect and our valuation has been undertaken

on the assumption that the property is either fully compliant or capable of being made

fully compliant at no significant additional cost with all relevant disability access

requirements.

2.44 We have assumed in our valuation that all regulations have been complied with.

3 Valuation

Methodology

Trading

Properties

3.1 The trading properties have been valued having regard to trading potential assuming

that they are well maintained and effectively managed, offer high standards of care

and meet the requirements of their registration where applicable.

Vacant

properties

3.2 The closed down properties have been valued as vacant in their current physical

condition subject to existing use. These vary between properties which have been

mothballed and those that have been refurbished and are ready to trade.

Tenanted

property

3.3 There is a single property, Bellevue let to Golden Lane Housing Limited for a term of

60 months from 22 June 2018 at a rent of £1,950 per month. Whilst this is above the

rental value we would expect as a residential property (within use class C3), the

Tenant has a break option on the 3rd anniversary of the term. As a result, whilst we

have considered this in our valuation, we have not attributed a material value to this

income stream over and above the closed down value.

Linked

properties

3.4 There are a number of properties which are linked, either physically or for accounting

purposes or by Title. Some these have been valued as one asset whilst others have

been valued separately but the valuation has considered the linked nature of the

assets and the values should be considered as apportionments of the whole.


Trade related

property

3.5 Care facilities which are owner occupied fall under the category of trade related

property valuations. RICS Valuation Property Guidance Applications 4 (“VPGA4”) of

the Red Book relates specifically to trade related valuations, goodwill and the general

approach to be adopted for the capital valuation of properties which are normally sold

on the basis of their trading potential. The guidance assumes that the existing use of

the property will continue although where it is clear that a property may have a higher

alternative use value comment should be made.

Reasonably

Efficient

Operator

3.6 The owner operated care facilities trading potential is appraised using the concept of

a Reasonably Efficient Operator (“REO”), defined in VPGA4 2.10 as:

“A concept where the valuer assumes that the market participants are competent

operators, acting in an efficient manner, of a business conducted on the premises. It

involves estimating the trading potential rather than adopting the actual level of trade

under the existing ownership and it excludes personal goodwill.”

In consequence, if a business is trading below REO and management expectations

and, in the opinion of the valuer, could achieve a higher level of EBITDA (Earnings

before Interest, Tax, Depreciation and Amortisation costs) then the valuer should

reflect this in his composition of Fair Maintainable Turnover (“FMT”) and the resultant

Fair Maintainable Operating Profit (“FMOP”). For example, a REO may be able to

enhance fees, occupation or reduce costs. Conversely, if the business is achieving

EBITDA levels in excess of industry standards the valuer should adjust FMOP

accordingly to reflect levels achievable by a REO.

Operational

Entity

3.7 The valuation of property fully equipped as an operational entity and valued having

regard to trading potential usually includes:-

● The legal interest in the land and buildings;

● The trade inventory, usually comprising all trade fixtures, fittings, furniture,

furnishings and equipment; and

● The market’s perception of the trading potential, together with an assumed ability

to obtain/renew existing licences, consents, certificates and permits.

Consumables and stock in trade are normally excluded from the valuation.

Goodwill 3.8 VPGA4 2.9, states that personal goodwill, that is the value of profit generated over

and above market expectations that would be extinguished upon sale of the property,

together with any financial advantages relating specifically to the current operator of

the business, such as taxation, depreciation policy, borrowing costs and capital

invested in the business, should be excluded from the valuation. The valuation does

include the inherent goodwill which attaches to the building and runs with the

property by virtue of circumstances such as its location, design, planning permission,

licence and occupation for its particular use.

Registration 3.9 When properties are sold as fully operational businesses the new owner will normally

expect to renew the licences/consents and take over the benefit of existing

approvals, certificates and permits, together with any contracted future admissions

and the continuing occupation of existing residents which are an important part of the

on-going business. The properties have been valued having regard to their trading


potential, as defined above, as operational concerns and inclusive of trade furniture,

furnishings and equipment. We have therefore assumed that each property will

continue to have the benefit of all necessary licences, fixtures, fittings, furniture,

furnishings and equipment to enable it to remain in full operation as a business

entity.

Purchaser’s

Costs

3.10 The valuation figures reflect our opinion of the consideration that would appear in a

hypothetical sale and purchase contract and make no allowance for any acquisition

costs i.e. stamp duty or professional fees in accordance with normal valuation

convention. No allowances were made for vendor’s expenses of realisation or for any

taxation liability arising from the sale of any property.

3.11 In arriving at our FMT, we have had regard to the accounts and budgets provided to

us. We have examined the trading history of the individual units, the current trading

position and any fluctuations in the variables that have had a marked influence on

the profitability of the business.

Central costs 3.12 We have been provided with the central management costs for the accounting

periods provided and forecast going forward. We have considered the other external

due diligence reports prepared in connection with the Transaction, particularly their

analysis of central costs excluding the fostering business which does not form part of

our valuation. Our projected fair maintainable central costs of circa £30.4m are

projected at approximately 17% of the FMT revenue. The central costs have not

been apportioned across the individual assets but considered solely against the

portfolio with no differentiation for different types and categories of care.

Portfolio

premium

3.13 We have made an allowance for a portfolio premium which we believe could be

achieved on a portfolio of this scale as at the date of valuation. A portfolio premium

reflects the attractiveness of a good quality portfolio of assets, also recognising

advantages of scale and the impact of the central costs necessarily incurred in their

operation. There are a limited number of platforms of this scale and quality in the

market and there are none currently available to purchase to the best of our

knowledge. However, a number of portfolios have transacted over the last 18

months including Keys Group, Witherslack and Kisimul. We would however caution

that these premiums are difficult to quantify precisely and can be transient so would

suggest that this premium should be considered carefully.

Profits Method 3.14 Our valuation has been undertaken using appropriate valuation methodology and our

professional judgement.

3.15 We have valued the trading properties by reference to the profits method as this is

the basis on which such properties are commonly bought or sold.

Comparative

method

3.16 In undertaking our valuation of the properties, we have made our assessment on the

basis of a collation and analysis of appropriate comparable transactions, together

with evidence of demand within the vicinity of the subject property. With the benefit

of such transactions we have then applied these to the property, taking into account

size, location, aspect and other material factors.


Comparable evidence

Comparative

method

3.17 In arriving at our view on values we have considered information available to us on

sales of comparable care facilities. It should be noted that the healthcare market

remains relatively opaque from a comparable perspective with many properties and

portfolios sold off market or subject to confidentiality agreements. However, Knight

Frank is regularly involved as agent, adviser or valuer in many of the sector’s leading

portfolio transactions and individual sales, including on-going work for many of the

providers in the elderly markets. Whilst we cannot be explicit on a number of deals

we have been involved with, the intellectual property gleaned from this involvement is

used in assessing the valuation factors attributed.

Valuation considerations

Trading

Properties

3.18 The subject properties have been valued having regard to trading potential assuming

that they are well maintained and effectively managed, offer high standards of care

and/or education and meet the requirements of their registration.

Portfolio

premium

3.19 The portfolio premium has been applied. After the deduction for the head office

costs the portfolio YP multiplier attributed equates to 11.97x the FMT EBITDA of

£29.159 million.

Realistic

Marketing and

Exposure

Periods

3.20 We are of the opinion that a realistic period of time in order to achieve our opinion of

Market Value as a portfolio would be six to twelve months. This view is based on our

extensive experience of involvement in many of the major transactions in the portfolio

market as well as acting as agents or valuers on individual transactions across the

sector and country.

Valuation bases

Market Value 3.21 Market Value is defined within RICS Valuation - Professional Standards as:

“The estimated amount for which an asset or liability should exchange on the

valuation date between a willing buyer and a willing seller in an arm’s length

transaction after proper marketing and where the parties had each acted

knowledgeably, prudently and without compulsion.”

Valuation date

Valuation date 3.22 The valuation date is 19 September 2018.

Market Value

Assumptions 3.23 Our valuation is necessarily based on a number of assumptions which have been

drawn to your attention in our General Terms of Business, Terms of Engagement

Letter and within this report.

Key

assumptions

3.24 Whilst we have not provided a summary of all these assumptions here, we would in

particular draw your attention to a key assumption that:


The properties are all effectively managed, offer high standards of care and meet the

requirements of the relevant regulatory bodies.

Market Value –

Portfolio Sale

3.25 We are of the opinion that the Market Value of the interests in the trading properties

on the basis that they are fully equipped as operational entities and valued having

regard to their trading potential, and the interests in the vacant properties assuming

the business is closed, on an aggregate basis, assuming a disposal of the assets as

a portfolio in an orderly marketing process, as at the date of valuation, is

£350,000,000 (Three Hundred and Fifty Million Pounds).

Summary 3.26 A summary of the portfolio valuation is set out in the table below:

Portfolio Valuation

FMT Income £000s 179,098

FMT EBITDAM £000s 59,606

FMT Management Total £000s 30,447

FMT EBITDA £000s 29,159

Portfolio YP 11.97x

Portfolio MV £ 350,000,000

Portfolio MV per bed / place £ 202,312

Apportionment

by Tenure

3.27 A summary of the apportionment of the portfolio value by tenure is set out in the table

below. Please note this constitutes an informal apportionment only.

Apportionment by Tenure No of Properties £

Freehold 153 331,501,104

Long Leasehold* 12 7,980,132

Leasehold 59 10,518,764

* A lease with an unexpired term of at least fifty years on which a nominal ground rent is payable

Material Values 3.28 As required under UK Appendix 7.1(m) of the RICS Standards we can confirm that

the Market Value of the portfolio contains three properties, all SEN schools, which

have an apportionment of value exceeding 5% of the total. These are set out below:


Property

Tenure Apportionment %

Apportionment

£

Grateley House School Freehold 8.06 28,200,833

Southlands School Freehold 6.83 23,918,322

Hill House School Freehold 5.64 19,724,062

4 Property risk analysis

General comments

General

comments

4.1 In this section of our report we summarise the property related risks which we have

identified as part of our valuation report and which we consider should be drawn to

your attention. This summary should not be taken to be exhaustive and must be

considered in conjunction with the remainder of the report. Nothing in this section

should be construed as being a recommendation of taking any particular course of

action.

Risks relating to the property

Capital

Expenditure

(“Capex”)

4.2 We have considered Capex spend on the properties as provided in the financial

information received. In valuing the properties inspected we have reflected any

requirements for further capex apparent to us. Those properties valued on a desktop

basis have been assumed to require no significant capex other than proposed in the

information provided. No significant capital project commitments have been

assumed, including proposals for refurbishment and re-positioning of properties

currently closed.

Condition 4.3 A stated earlier the properties inspected generally appeared to be in a good or

reasonable condition commensurate with their age and use. We have relied upon

the assumption that the condition of the properties valued on a desktop basis is

similar and that the properties remain in a condition suitable for continued operation.

Statutory

licences

4.4 We have not been provided with registration certificates for the majority of the

properties and whilst we have verified where possible, the children’s homes have

been assumed to hold the necessary registration to trade as projected in our

valuation. Should this not be the case then the values reported herein may be

adversely affected.

Registration

Compliance

4.5 A small number of properties are rated Inadequate by the relevant regulator and this

has the potential to impact on the values reported herein. Historically the Group has

been quick to close or improve inadequate services and this is likely to remain the

case in the sensitive care sector they operate in. In the event a home is rated

Inadequate in the future or unable to make improvements rapidly then it is possible


that business may be closed, albeit often short term, and the trading values

impacted.

Legal title 4.6 Any legal title issues are matters which should be referred to your legal advisers.

Tenure -

leaseholds

4.7 We have not been provided the leases for nine occupational leases and 16 long

leasehold properties. As a result we have apportioned no values to the occupational

leases but you should be aware that there is always the potential that these could be

liabilities. However we have been provided with rents due and based on this at the

date of valuation we do not believe this to be the case. In the case of the long

leaseholds we have considered these to be let on peppercorn or nominal ground

rents and to be typical benign head leases. Again in the event this is not the case

then the values reported herein may be impacted.

Income risks

National Living

Wage

4.8 The NLW will see pay increased to £9 per hour by 2020. As a result the business will

see wage inflation which could impact on trading potential in the event fee rates do

not increase to offset.

Sleep in care

rates

4.9 Sleep in pay rates remain a contentious and unsettled issue. There remains the

potential for this to impact on trading potential across the sector.

Cashflow 4.10 We have relied upon the trading information provided to us by the Client and have

assumed the information to be accurate and reliable. Due to the importance that the

market attaches to trading figures actually achieved, we would comment that in the

event of a future change in the trading potential or actual level of trade from that

indicated by the figures supplied to us, the Market Value could vary. In arriving at

our figure of value, we have taken into account current market conditions. There

may be short term movement in value caused by various factors affecting the general

economy of the property market or care home business outlook.

4.11 This report is based upon our own investigations and such other sources as detailed

in the report, and with relation to cashflow, we make the assumption that the

business shall at all times be managed and operated by a competent and diligent

owner devoting all time and care to the affairs of the business. Although the trading

fortunes of the business may fluctuate our valuation assumes that the trading

position, financial and market situation prevailing at the date of the report shall not

vary during the period of assessment and that the nature, character, extent and

pricing structure of the business shall not materially alter, unless specifically stated to

the contrary in the report.

Economic & property market risks

EU Referendum

Comments

4.12 The impact of the UK’s vote to leave the EU may have some implications for health

and social care, not least because it has created a period of significant economic and

political uncertainty at a time when the health and care system is facing some

operational and financial pressures already.


4.13 The EU’s policy of freedom of movement and mutual recognition of professional

qualifications within the EU means that many health and social care professionals

currently working in the UK have come from other EU countries. It is widely

acknowledged that the NHS is currently struggling to recruit and retain permanent

staff.

4.14 Until the UK extracts itself from its obligations under EU treaties, the policy on

freedom of movement remains unchanged. Given the current shortfalls being

experienced by both the health and social care sectors, the government must clarify

its intentions on EU nationals working within health and social roles in the UK. At

present, approximately 6% of social care workers in the UK come from the EU (with

a large weighting towards London (c.12%) and south east (c.10%) and 5% of NHS

staff (80,000 and 55,000 jobs respectively) and as such the government will want to

avoid EU staff currently working in the NHS deciding to leave to work in other

countries.

4.15 The impact on social care of not having enough staff means that potentially, care

homes may need to either, pay higher salaries to attract workers into the sector or

increase the amount of agency staff usage (even more expensive). The impact of

increased staff costs would of course lower net profit margins or lead to cost cuttings

in other key areas.

Valuation risks

Methodology 4.16 You need to be aware that the profits method requires the input of a large amount of

data, which are rarely absolute or precise, together with the making of a large

number of assumptions. Small changes in any of the inputs can cumulatively lead to

a large change in the site value. Some of the inputs can be assessed with

reasonable objectivity, but others require a high degree of professional judgement.

Risks relating to the terms of the instruction

Inspection 4.17 This means that there is a higher than normal degree of uncertainty attached to our

opinion of value and limits the reliance which should be placed upon our report.

Restricted

timescales

4.18 Upon your instructions, our valuation has been undertaken within limited timescales.

This means that there is a higher than normal degree of uncertainty attached to our

opinion of value and limits the reliance which should be placed upon our report.


Signature

PA Evans, MRICS

RICS Registered Valuer

Partner, Healthcare

For and on behalf of Knight Frank LLP

Reviewed by not undertaken by:

JM Evans, FRICS

RICS Registered Valuer

Head of Healthcare

For and on behalf of Knight Frank LLP

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