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Private Healthcare Provider Leaves UK Market Amid Challenging Rents

Private Healthcare Provider Leaves UK Market Amid Challenging Rents

South African private healthcare provider Netcare has announced that it is selling its majority stake in the UK’s biggest chain of private hospitals and leaving the UK market.

The news comes amidst BMI’s embroilment in £1.5bn of debt, as a short-term deal with lenders has expired.

The private healthcare group has failed to secure a reduction in its long-term premium renting costs for 35 of 59 hospitals, which are tied to long-term premium leases under a property operating company scheme arranged prior to the financial crash.

Exceptionally low inflation renders rent commitments “unaffordable”

Netcare acquired BMI Healthcare’s parent group, GHG in 2006, and quickly restructured the business into a property operating company model, whereby the ownership of the hospital sites was transferred to a series of property companies, who leased them back at fixed, long-term rates to operating company BMI healthcare.

Since the financial crisis in 2008, BMI has accumulated £1.5bn in debt, whilst property ownership of the hospitals was taken over by lenders in 2015.

Although BMI profits are in line with competitors, it faces fixed rent rises of 2.5% a year that are taking a 20% cut of turnover.

These rises, according to Netcare CEO Dr. Richard Friedland, are “unsustainable” for the company.

Friedland says that when the lease arrangements were first settled before the financial crisis, “they were considered market-related and provided for a fixed escalation in rent of 2.5% per annum.”

“However, following the global financial crisis of 2008, the accompanying declining private medical insurance (PMI) demand, and the sustained period of exceptionally low inflation in recent years, BMI Healthcare’s rent obligations have grown to be unaffordable,” he said.

Opco/propco structure leaves many businesses tied to “unsustainable” rents

Similar challenges have faced many property-heavy businesses operating under an operating company/property company model, or ‘opco/propco,’ structure since the financial crash – with care homes, pub chains and car parks all being affected by an inability to repay rent at the high rates dictated by their agreements.

The opco/propco model was favoured by these businesses when the lending market was strong, as a way to capitalise on property assets and free up equity via debt, without selling real estate.

Essentially a form of sale and leaseback under which the freehold property rights can be retained by the same group, opco/propcos work by separating a group into two separate companies for property ownership and business operations.

The propco buys property title from the operating company in order to raise capital by borrowing on these real estate assets, and the operating company controls the business and pays to lease the operating premises from the propco.

Secured income from the operating company’s often long-term lease covers the property company’s debt payments, while the property company’s debt-raised capital is used to invest in and grow the operating company.

Attractive – but risky

However, although this structure attracted many companies during the property boom for its ability to free up and maximise a group’s equitable assets, it has proven risky – particularly considering the premium, long-term lease commitments and bold debt structuring plans that were confidently taken out by companies before the financial and lending markets crashed.

This has left opcos like BMI struggling to keep up with high fixed leases. For propcos, it is hard to find refinancing for renewed loans in the current lending market. Having been left with large loans on devalued property assets that potentially breach the terms of their loan to value covenants, many property companies, including those owning BMI’s hospitals, have had their assets seized by lenders.

The model is now less popular, and those that adopt it are more cautious about burdening the operating company too greatly with long-term rental commitments, perhaps transferring ownership of a portfolio of properties more gradually, to protect the operating company.

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