Ann: Healthscope Update, page-91

I’ve researched HCW a bit and figured I’d share some my guestimates. Feel free to tear these arguments apart.

The current Healthscope operated properties owned by HCW have cap rates that are likely partially based on the expectation of receiving 100% rent from 2025. If the future agreed upon rent is reduced by 15%, the cap rates and valuations on the Healthscope operated properties will need to be adjusted accordingly. My back of the envelop calculations suggest a reduction of $200m in Healthscope operated property valuations owned by HCW, which would increase gearing from 32% to roughly 38% (i.e., manageable). However, a rent reduction closer to 20% or more will more likely prove much more problematic from a balance sheet perspective.

Equally significant is the unlisted entity (UHF) to which HCW has indirect exposure. It has higher gearing at 41% (and only Healthscope operated properties). The covenant is unlikely to be more much more than 50%(?) A rent reduction of 15% may result in gearing of 48%. How many boards would be entirely comfortable with that? A rent reduction of 20% will almost certainly exceed the covenant, triggering the need to sell a property or raise capital (see ECF for a similar example in 2024 where the unlisted asset was the undoing).

If even one of the properties owned by HCW is not purchased as a continued operation, the numbers look much worse. A closing of a major hospital seems unlikely, but what about the four mental health properties owned by HCW (and operated by Healthscope)? It’s a risk with significant consequences.

As a potentially more chronic challenge facing HCW: Structural issues in overnight stay hospitals, which represent most of HCW's exposure, create conflicting financial incentives. Doctors are typically paid more for surgeries than follow-up care, encouraging shorter stays and quicker discharges. However, hospital owners rely heavily on accommodation fees from multi-night stays rather than surgical procedures themselves. This creates a revenue squeeze as shorter stays reduce accommodation income while fixed operating costs remain high. For HCW, this structural misalignment presents an ongoing challenge with no easy solution.