HMC Buys $1.2bn HealthScope Portfolio30 March 2023
HMC Capital has confirmed it will acquire the $1.2bn Healthscope Portfolio of 11 Private Hospitals from US based Medical Properties Trust.
HMC Capital will split the assets between its listed HealthCo REIT and a new unlisted fund with HealthCo taking 4 assets and the balance acquired by the new unlisted fund.
HealthCo will raise $125 million in new equity to help fund its commitment, while HomeCo is planning to raise $325 million for the unlisted fund.
The portfolio represents critical healthcare infrastructure in Australia’s major capital cities and benefits from long term absolute net leases (16-year initial term plus 8 x 10 year options) with Australia’s second largest private hospital operator. Healthscope is the second largest private hospital provider in Australia, operating 39 hospitals with ~5,200 beds and over 270 theatres.
The acquisition has been secured on an implied acquisition yield of 5.8% and an unlevered internal rate of return of >9%.
HMC are pursing the Health agenda which is driven by Australia’s ageing population, increased health expenditure, increasing incidence of chronic diseases, escalating hospital visitations and high barriers to entry. HMC also point out that the Public Hospital system is training, elective surgery’s continue to experience significant backlogs whilst private health insurance membership sees continued growth.
HMC Capital Managing Director and CEO, David Di Pilla, said “HMC Capital is pleased to announce another major transaction for the group which delivers on our strategy to deploy capital into high quality alternative assets with significant pricing power and development upside on behalf of our capital partners.
“Our partnership with Healthscope on this transaction enabled HMC Capital to shape a compelling transaction with a significantly improved tenant covenant and rental growth upside via CPI-linked indexation and higher development returns.
“This acquisition transforms HCW into Australia’s largest diversified healthcare REIT with greater exposure to critical healthcare infrastructure in Australia’s major capital cities. HCW is now well positioned for S&P/ASX300 index inclusion and will benefit from increased liquidity following the capital raising.”
“We have now commenced fund raising for the new unlisted fund which will co-own ~$1bn of Healthscope hospital assets with HCW. This acquisition accelerates our plans to establish an unlisted fund focused on large-scale healthcare opportunities and developments. We see this fund as being highly complementary to HCW and its ability to access larger-scale investment and development opportunities. We are already in active discussions with multiple domestic and global institutional investors who are undertaking due diligence on the opportunity,” Mr Di Pilla said.
HMC Capital Chair, Chris Saxon, said “This transaction demonstrates HMC’s ability to unlock strategic and large-scale opportunities for our capital partners which are positioned to benefit from favourable long-term megatrends. Acquisitions of the scale and quality of the Healthscope Hospital Portfolio are extremely rare in Australia.”
All of the hospitals are leased to Australia’s second-biggest private hospitals group Healthscope on long term absolute net leases (16-year initial term plus 8 x 10 year options).
The portfolio is being acquired in three tranches with Tranches 1 & 2 settled upfront and Tranche 3 completing on a deferred basis as outlined below:
Tranche 1: HCW to directly acquire 4 mental health / rehabilitation hospitals for $256m with expected settlement in May-23
Tranche 2: Unlisted Fund to acquire 3 acute care hospitals for $474m with expected settlement in May-23. The Unlisted Fund to be initially capitalised with HCW owning 100% of equity ($261m) with HCW’s ownership reducing to ~50% post settlement of Tranche 3; and
Tranche 3: Unlisted Fund to acquire remaining 4 acute care hospitals for $470m with expected settlement in Jul-Sep 2023. The deferred settlement provides up to 6 months for HMC to complete an unlisted institutional fund raising of $259m (~50% of equity in the Unlisted Fund). HMC will backstop the Tranche 3 equity requirement using its increased balance sheet liquidity and debt facilities of more than $350m.
Upon settlement of all three tranches, the Unlisted Fund will own a ~$1bn hospital portfolio with ~50% equity interest by HCW and ~50% interest by third party institutional investors.
Healthcare REIT Fund Raising
In order to fund the acquisition, HCW is undertaking a $320m underwritten equity raising, comprising a $89m institutional placement and a $231m 1 for 1.90 pro rata accelerated non- renounceable entitlement offer at an issue price of $1.35 per unit. HMC Capital will support the Equity Raising by providing a sub -underwriting commitment for its full $48m entitlement in the institutional component of the Entitlement Offer, in addition to sub-underwriting up to $75m under the retail component of the Entitlement Offer.
HMC has also agreed to fully fund a 1 for 28 bonus unit in HCW in relation to all new units issued as part of the Equity Raising subject to certain conditions. This will be funded out of HMC’s existing holdings in HCW via a Selective Buy-Back (Selective Buy-Back) of HCW units equivalent in number to the bonus units issued, subject to HCW Unitholder approval.
The HWC Capital Raising at a $1.35 Issue Price represents a:
- -5.3% discount to TERP of $1.39 on 29 March 2023 (including Bonus Unit issue)
- -8.9% discount to the last trading price of $1.4275 on 29 March 2023 (including Bonus Unit issue)
- -15.9% discount to the 30-day VWAP of $1.55 on 29 March 2023 (including Bonus Unit issue)
HMC Capital Raising
HMC is undertaking a $125m fully underwritten institutional placement and a non- underwritten security purchase plan that will be capped at $30m. The HMC Equity Raising will be conducted at an issue price of $3.50 per share which represents:
- -4.1% discount to the last traded price of $3.65 on 29 March 2023
- -3.9% discount to the 5-day VWAP of $3.64 up to and including 29 March 2023
The issue price of the shares under the SPP will be $3.50 (being the Placement price). The SPP will be capped at $30m. As the SPP is not underwritten, the SPP may raise more or less than this amount. If the SPP raises more than $30m, HMC may decide in its absolute discretion to accept applications (in whole or in part) that result in the SPP raising more than $30m. If HMC decides to conduct any scale back of applications, for example because the aggregate amount applied for under the SPP exceeds HMC’s requirements, the scale back will be applied on a pro rata basis to shareholdings of participating eligible shareholders at the record date of the SPP.
Unlisted Fund Raising
The acquisition of the Healthscope Hospital Portfolio has accelerated HMC’s plans to establish a $2bn+ healthcare and life sciences institutional Unlisted Fund targeting a 10%+ equity IRR.
The Unlisted Fund will target large-scale hospital and life science investment opportunities including developments with the potential to generate enhanced total returns. The Unlisted Fund is expected to acquire HMC’s interest in Camden Stages 2 & 3 in the future and other major development opportunities which are currently under investigation.
The Unlisted Fund will enable HCW to capture significant development upside through its co-investment whilst also balancing its objective to deliver stable and growing distributions via its operating portfolio.
Importantly, the Unlisted Fund will not acquire assets that fall within HCW’s investment mandate without HCW being offered the opportunity first.
The Unlisted Fund will initially own ~$1bn of Healthscope hospitals which provides potential investors with a compelling opportunity to invest in a large-scale portfolio of critical hospital infrastructure with future development upside.
The deferred settlement arrangements for Tranche 3 of the Healthscope Hospital Portfolio acquisition gives HMC the opportunity to run a formal process to select a preferred strategic capital partner for the Unlisted Fund. HMC will be formally launching its process in the coming days and is already in active discussions with 5 parties who are undertaking due diligence.
Target proceeds from the capital raising will be used to fund the acquisition of the Tranche 3 properties in Jul-Sep 2023 which HMC has agreed to backstop.
The Unlisted Fund has also secured $550m of underwritten senior debt commitments in place to acquire the Tranche 2 and Tranche 3 assets and will have initial gearing of 45%.
HMC reaffirms FY23 DPS guidance of 12.0 cents which is in-line with FY22 and supports HMC’s high return on equity growth strategy.
“This transaction demonstrates our evolution into a more sophisticated and diversified alternative asset manager which can take advantage of compelling opportunities which are emerging in a challenging operating and funding environment.
In-line with our strategy, HMC has used its balance sheet to provide major underwriting support to secure this opportunity and significantly grow assets under management. As a result, HMC expects to generate significant new recurring and transactional funds management income streams from this transaction”
“Following the establishment of the unlisted healthcare fund, HMC will have five major growth engines with diversified capital sources and strategies which are focused on sectors and opportunities which are scalable.
“We are now tracking 12 months ahead of our previously stated $10bn AUM target by the end of calendar year 2024,” Mr Di Pilla said.
HWC has improved guidance for FY23 DPU from 7.5cpu to 7.6cpu (4Q FY23 DPU of 2.0 cents), which HCW expects to be FFO covered on a pro forma basis. The annualised 4Q FY23 DPU of 8.0cpu implys a distribution yield of 5.9% at the Issue Price