When retail failures hit the headlines, landlords across the UK take a deep breath and prepare for the inevitable hit on rental income.
So what happens when one of the country’s biggest private care home operators goes into administration? Does the same fear strike the hearts (or bottom lines) of landlords?
Four Seasons Health Care, the private care home giant owned by Guy Hands’ private equity firm Terra Firma and under the effective control of its lenders, led by the US hedge fund H/2 Capital Partners, last week put two of its holdings – Elli Investments and Elli Finance – into administration following a two-year battle to restructure its £525m debt pile.
Administrators at Alvarez & Marsal are now seeking a buyer for the business, which operates 322 care homes and hospitals.
But it is a crowded market out there, with rival operators Barchester, Care UK and HC-One also up for sale. They have all been on the market for more than seven months.
Healthy investment appetite
Although the collapse of Four Seasons has made national headlines, it is important to remember that the two holding companies that were put into administration do not directly own Four Seasons’ 322 care homes and hospitals.
As the operator has not been put into administration, rent payments to landlords will not be affected, says a Four Seasons spokesman. Homes and hospitals are run by the existing management and finance teams, who “will continue to pay rent to landlords in line with existing practice”.
However, with the Four Seasons portfolio now added to a growing list of care home operators up for sale, could appetite for the sector dwindle?
John Gladstone, director of international capital markets, EMEA healthcare at JLL, insists not.
“Three of the UK’s largest care home groups have effectively been on the market since last summer, but that doesn’t mean there’s a lack of interest in the sector,” he says. “Certainly, a lot of investors have been looking at those opportunities, given the potentially attractive yields compared to other sectors and new interest from the larger infrastructure investors.”
However, given the scale and complexity of the transactions and subsequent restructuring, closing deals has been much delayed, Gladstone says.
But Knight Frank head of healthcare Julian Evans says any delays are due to ongoing uncertainty as a result of the UK’s continued negotiations to leave the European Union.
“What has delayed any sales processes has absolutely been due to Brexit, it’s had nothing to do with the UK social care arena,” Evans says.
He adds that Four Seasons presents a “fantastic opportunity” to enter the sector – particularly for international investors. Despite recent bad news stories, Evans predicts funds and institutions are looking to invest $25bn into the sector.
“The impact on the healthcare arena, in my opinion, absolutely won’t dissuade investors,” he says. “If anything, it will be seen as an opportunity for a potential entry into the UK arena.”
Trouble ahead?
Savills head of healthcare Craig Woollam holds a more hesitant view on the health of the care home sector.
He says a lot of homes that rely on government funding are being closed as local authorities try to peg back fees amid funding pressures.
“We are seeing this slow continued erosion of care providers in the sector, particularly those which have less than 30 beds and are reliant on state funding,” he says. “This is a situation that is going to get worse if local authorities don’t wake up to the challenges that they have surrounding fees and provision. We will be facing a problem in the next three to four years.”
However, he says landlords “must not panic” if they ensure a reasonable covenant, negotiate good terms and agree a deal with a stable tenant.
So while landlords need not panic yet about any loss of rent on care home assets, the sector does appear to be in need of a little TLC. As a nation we may be living longer, but without the right investment in the care sector (exacerbated by the continuing investment paralysis caused by Brexit), demand and stock may not match up.
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