Ann: Healthscope Update, page-342

The initial rent on the 22 properties sold in the transaction was $123.4m ($62.9m for the Northwest portfolio, $60.5m for the MPT portfolio now owned by HCW/UHF). EBITDA for the Hospitals segment in FY18 was $345m, with my estimate of EBITDAR being c$362m (they leased 12 smaller hospitals for I estimate c$17m). EBITDAR rent coverage was thus c2.6x ($362m on c$140m base rent).

When HCW bought the MPT portfolio in March 2023 base rent was reset back down to c$61.2m (5.1% cap rate on $1200m purchase). This supposedly gave them > 2.0x EBITDAR coverage ratio at the facility level suggesting the 11 facilities were making at least $122.5m of EBITDAR for Healthscope when the deal was done.

Its pretty clear industry profitability has been hit badly over the last 6 years by the ongoing fact that health insurers have reduced the benefits payout ratio, while the Government has done nothing to stop them. Butler has talked tough but is yet to lift a finger to address this issue. Supposedly he will act in the next couple weeks so watch this space. MPL vs. RHC tells the tale pretty well. Over the last 10 years MPL has returned 188%. RHC which is by far the best private hospital operator in the country and owns a stack of its hopsitals outright has returned -25%.

The other issue is nursing wage rates have gone through the roof, with potential for more to come based on the "gendered pay" awards coming out from the Fair Work Commission, who seem like they are completely detached from reality. I suspect at some point the Govt may need to directly subsidise private hospital nurse salaries like they effectively already do for chidcare operators and aged care operators.

I would think HCW/UHF and Northwest may both need to again re-set rents to make operations sustainable.

But I see very little leverage for the secured debt holders in this negotiation. Back in 2019, Healthscope owned 28 hospitals, leased 12 and managed 3 on behalf of the Adelaide Community Healthcare Alliance (ACHA). Since then 22 were sold to MPT and Northwest, suggesting Healthscope only owns a maximum of 6 freehold assets, still manages 3 on behalf of ACHA and leases the remainder. If HCW's disclosure that its rents were generating a 2.0x EBITDAR coverage ratio in 2023 is accurate, Healthscope must be making a reasonable amount out of the total portfolio of leased hospitals. Were its leases to be terminated it would lose 100% of this facility level EBITDAR and its debt servicing capacity.

Its hard to see how the secured debt holders thus don't take a massive bath on their $1.6bn face value if they only own 6 freehold properties.

HCW/UHF and Northwest's negotiating position will only be as good as the ability for a new tenant to make money on their facilities however. Fortunately the not for profit operators that are looking at their facilities (either to buy or lease) have an advantage vs. Healthscope in that they don't pay payroll tax. E.g. NSW's rate is a fairly hefty 5.45% of wages.