The not-for-profit St John of God Health Care is understood to have held talks with David Di Pilla’s Healthco Healthcare and Wellness REIT about taking over some real estate leases from tenant Healthscope.
The future of Healthscope – the country’s second-largest private hospital operator – hangs in the balance as owner Brookfield wrestles with about $1.6bn debt. The situation is expected to come to a head in March when it may breach debt covenants.
This throws the spotlight on one of its largest landlords, Healthco Healthcare and Wellness REIT.
Brookfield purchased Healthscope for $4.4bn in 2019, fending off competition from BGH Capital.
It then sold Healthscope’s hospitals to Medical Properties and Northwest Healthcare Properties for about $2bn.
Medical Properties on-sold its 11 hospitals to David Di Pilla’s HMC Capital for its listed healthcare real estate investment trust in a $1.2bn deal announced in March 2023.
The purchase was made by the HMC-managed Healthco in conjunction with a newly established HMC-managed unlisted fund, which has debt.
It cut a deal on rents with Healthscope: they would be reduced for two years in exchange for higher increases over the longer term.
At the time of the deal, rent was increasing annually at 2.5 per cent, but in return for a reduction, future rents will increase by 4 per cent or more if inflation is more than that level.
NorthWest owns the other half the Healthscope real estate portfolio, and receives 2.5 per cent increases in rent annually. Healthscope has been trying to get landlords to lower rents, but they’re taking a hard line.
The share price of Healthco has fallen to 92c from over $2 when it first listed in 2020 and its market value is currently $518.9m. It raised equity for the Healthscope hospitals purchase at $1.35 per share.
Its last results showed it had $478m of borrowings.
Healthco is trading at one of the largest discounts to net tangible assets among the locally listed real estate investment trusts, with investors betting a default by Healthscope may be on the cards. It will be in the spotlight when it reports its half-year results on February 14.
St John of God operates 14 acute hospitals in Australia and 18 altogether. In some cases it owns the real estate.
Not-for-profits like St John of God, affiliated with the Catholic Church, can be at an advantage to commercial operators because they don’t pay tax.
Healthco declined to comment, but sources close to the company said several parties had made approaches about taking on leases with the fund.
The most valuable assets in the portfolio are the $350m Knox Private Hospital, Nepean Private Hospital ($176m), Northpark Private Hospital ($101m), Sydney Southwest Hospital ($97m) and Campbelltown Private Hospital ($94m).
Assets valued between $90m and $30m include The Victorian Rehab Centre, Pine Rivers Private Hospital, The Geelong Clinic, Sunnybank Private Hospital and Ringwood Private Hospital.
Brookfield is understood to take the view that there is no longer any equity left in Healthscope, which is not in default and is not believed to have breached any covenants.
If Healthscope breaches its debt covenant in March, as expected, it will free its syndicate of 25 lenders to offload loans – should they wish – at a discounted price.
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