How Healthscope’s pain will play out for landlords, as suitors circle

Bain Capital continues to show interest in buying Healthscope. Picture: iStock

Bain Capital has started building a team in pursuit of securing control of Healthscope, as it emerged this week the country’s second largest private hospital operator has defaulted on rent payments.

Healthscope’s landlord, HealthCo Healthcare and Wellness REIT, saw its shares crash by at least 7 per cent on Tuesday after it told the market it had issued breach notices to the hospital operator for failing to pay all rent due for March.

Part of the payment of the rent had been received, it told the market.

David Di Pilla, the boss of HMC Capital, which manages HealthCo, has maintained it would not reduce rents for Healthscope and it had been meeting its payment obligations, so the latest news caught the market somewhat off guard, causing the share price fall.

But, even so, Healthscope’s challenges have been playing out for about a year, with speculation a collapse of the business, owing $1.6bn to lenders, is a real possibility.

In a quest to protect HMC’s earnings stream and to provide a sustainable solution for Healthscope, Mr Di Pilla is now plotting a Healthscope buyout, aided by Macquarie Capital.

However, this sees him perform a delicate balancing act around conflicts of interest, with the new Healthscope owner likely eager to pay as low a rent as possible, while it is in HealthCo’s interest to secure as much from the tenant as possible.

It also shines a spotlight on the health of HealthCo’s balance sheet.

Healthscope’s owner Brookfield bought the Healthscope business in 2019 for $4.4bn and sold the real estate for about $2bn to fund the transaction, with the other landlord being Northwest Healthcare Properties.

HealthCo owns the properties after its parent company, HMC Capital, purchased 11 of Healthscope’s sites in 2023 for $1.2bn.

They are now held by HealthCo and an unlisted HMC Capital-managed healthcare fund.

It cut a deal to reduce its rent deal in place — at 2.5 per cent increases annually — for two years, to a lower rate.

In return, they accelerate to 4 per cent annually if inflation is more than that level.

HealthCo’s look through gearing, including its own debt and that of the unlisted fund, is estimated at over $700m with gearing in HealthCo and the unlisted fund at between 30 to 40 per cent.

HealthCo’s market value is $541m and the fund’s overall property portfolio is valued at $1.6bn, with 57 per cent comprising private hospitals, largely Healthscope’s.

Whether an equity raise may need to happen is a question that could come up in the coming weeks among analysts.

HealthCo said it had cash and debt of $100m and would seek support from HMC Capital as required, including the deferral of management fees.

Lenders – quite likely some being the same to Healthscope – may support Mr Di PIlla’s HealthCo.

And the unlisted fund recently had the Healthscope properties valued, but perhaps they now look inflated given its perilous position.

What’s more, other hospital operators, particularly not-for-profit groups, will unlikely be in a position to match Healthscope’s rents.

DataRoom revealed HealthCo has been talking to other hospital groups like St John of God and St Vincent’s Healthcare about occupying the sites, but it’s starting to look increasingly like even if Healthscope stays, the fund will be getting less rent through the door.

Meanwhile, HMC Capital is said to be in the box seat to buy Healthscope, but with Bain positioning itself by signing on healthcare experts for advice on buying the business, perhaps once again it is the Boston-based private equity firm that takes over one of Australia’s top companies that have become distressed.

Bain Capital purchased Virgin Australia after it collapsed amid the global pandemic and more recently the debt plagued Accolade Wines.

Healthscope’s woes come as Star Entertainment is expected to collapse any day, and Sanjeev Gupta’s GFG Alliance empire risks being brought undone by the administration of the Whyalla Steelworks in South Australia, in what could be the undoing of the stable unemployment and economy locally, as Wall Street declining sharply overnight Monday.

The difficulty for Mr Di Pilla is that investors have long memories, and he’s now in the hot seat over ensuring he can find a solution for investors that may be those called upon for funds raised in the future.

The market’s been astounded with what he’s managed to pull off so far, but they will be watching in the months ahead to see if the HMC Capital empire becomes a fallen one.