22 Healthscope hospitals to be sold
International property groups are positioning to take stakes in the $2.5 billion Healthscope real estate empire with Canada’s NorthWest Healthcare Properties raising funds to back its purchase and investors tipping New Zealand’s Vital Healthcare Property Trust may follow suit if it can make a deal stack up.
They are moving in the wake of Canadian asset manager Brookfield’s $4.4 billion takeover offer for Healthscope, with the suitor already agreeing to sell 22 hospitals for about $2.5 billion, which it will then lease back and run.
The real estate is being split between NorthWest and US group Medical Properties Trust, with each to acquire 11 hospitals.
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The US trust said it would fund its $US859 million ($1.2 billion) purchase using about $US200 million of proceeds from a recent share issue and existing credit facilities.
Meanwhile, NorthWest has unveiled a public offering in Canada to raise about $C125m ($132 million) to help fund its purchase. It will first repay debt then use the proceeds to meet funding milestones on its Australian property deal.
“The REIT expects that the immediate repayment of debt will better position NorthWest to execute the previously announced $1.2bn acquisition of an 11-property Australian hospital portfolio from Healthscope Limited and its affiliates while prudently managing its consolidated leverage,” NorthWest says.
The raising will cut NorthWest’s leverage to about 57% and it flagged further capital recycling activities.
NorthWest is backing Brookfield and played a crucial role in the takeover, agreeing to sell its stake of about 10% in Healthscope into the offer.
Investors have tipped the NZ-listed Vital, which is run by Northwest and has partially funded the Healthscope stake, will end up buying some hospitals.
Vital is not part of the initial property deal but views it as “potentially attractive” and has held talks about becoming part of the portfolio purchase.
But Macquarie analysts warn that Vital’s participation in NorthWest’s Healthscope deal may be difficult as they are being bought on a tight 5% capitalisation rate.
They say if Vital took a half share of NorthWest’s planned $1.2 billion acquisition, it will be 6-9% earnings per security dilutive given the equity required.
NorthWest’s purchase of the Healthscope facilities also includes a $525 million pipeline of brownfield expansions and capital projects. But Vital’s hefty fee structure may hurt its chances of getting involved.
“Given the tight cap rate on the properties, we see a vanilla deal of Vital acquiring half of the assets at 35% gearing would be dilutive to earnings,” Macquarie says.
“Raising capital with the stock trading materially below book would be dilutive to net tangible assets.”
The analysts said a review of Vital’s fees — which was prompted by complaints from major shareholders — could help improve financials on a deal.
One Vital investor told The Australian the trust’s fee structure made it hard to make the transaction work and there was a “very real risk” that any value arising from an acquisition would end up with the manager rather than unit holders.
Even if Vital hived off half the portfolio to a separate venture it has with Singaporean fund GIC, an equity raising of about $NZ400m ($384.6m) would be required, a big step up from the group’s market capitalisation of $NZ920 million, he added.
“I suspect we will get some concession of fees for incremental assets purchased to make the deal look better for Vital, but it will still be tough to make it stack up on a 5% cap rate,” the investor said.
This article originally appeared on www.theaustralian.com.au/property.
