HealthCo raising $320m to fund $1.2b acquisition of Healthscope hospitals

HealthCo Healthcare and Wellness REIT (ASX: HCW), a property investment vehicle that originated from the buy-up up of vacant commercial sites that once housed the Masters hardware chain, is gearing up for its biggest investment do date with plans to acquire 11 Healthscope private hospitals in a deal worth $1.2 billion.

HealthCo, which is backed by David Di Pilla’s HMC Capital (ASX: HMC) and listed on the ASX just two years ago, has announced plans to raise $320 million to help fund the acquisition which will make the property group landlord to Australia’s second-largest private hospitals operator.

The fully underwritten capital raising will comprise an $89 million institutional placement and a $231 million entitlement offer at the rate of one new unit for every 1.9 units held, at an issue price of $1.35 each.

The acquisition, which will be completed in three separate tranches, includes $350 million for the Knox Private Hospital in Melbourne, $147 million for The Mount Private Hospital in Perth and $176 million for the Nepean Private Hospital in Sydney’s west.

Once the deal is completed, it will give HealthCo full ownership of four hospitals and a 50 per cent interest in an unlisted fund that will own the remaining seven hospitals.

The fund – which is targeted to grow its asset base to $2 billion - will be managed by HMC Capital, with the company announcing it is currently seeking to raise capital for the new investment.

HealthCo says the acquisition will create a strategic partnership with Healthscope by unlocking future development opportunities with the hospital operator which is currently owned by private equity group Brookfield Asset Management.

The Melbourne-based Healthscope, which was acquired by Brookfield in 2019, owns 41 hospitals in Australia.

The acquisition by HealthCo, founded as a small healthcare property portfolio by HMC Capital (formerly known as HomeCo) after it repurposed vacant sites of Woolworths’ (ASX: WOW) former hardware chain Masters into homemaker centres, is perceived as a step-change for the REIT that it says could make it eligible for inclusion in the ASX300.

“This acquisition transforms HCW into Australia’s largest diversified healthcare REIT with greater exposure to critical healthcare infrastructure in Australia’s major capital cities,” says HealthCo chairman Joseph Carozzi.

“HCW is well positioned to continue to unlock significant value and growth via its enlarged $1 billion development pipeline post this transaction. Importantly, the establishment of the unlisted fund provides HCW with a strategic and complementary funding partner for major healthcare development opportunities.”

HealthCo’s senior portfolio manager Sam Morris describes the acquisition as a significant milestone for the REIT which he says has been on a ‘strong growth trajectory since IPO less than two years ago’.

“An acquisition of this scale and quality is a rare opportunity to invest in an integrated network of private hospitals that serve as critical healthcare infrastructure,” Morris says.

“The result is a materially transformed HealthCo as it relates to income security, scale and quality of the portfolio, which is positioned to benefit from favourable long-term industry fundamentals.

“Our partnership with Healthscope has resulted in a much more compelling transaction with HCW benefiting from a significantly improved tenant covenant and rental growth upside via CPI-linked indexation and higher development returns.”

HealthCo has been actively expanding its portfolio over the past two years, most recently announcing a decade-long lease agreement with private hospital group Mater for the Springfield Health Hub southwest of Brisbane, which is due to open in 2024.

That announcement coincided with news that it had acquired the Vitality Village Health Hub on the Sunshine Coast for $28.9 million.

Last year, the REIT also said it would be exercising its call option to acquire HMC Capital's interest in Camden Stage 1 The George Private Hospital in western Sydney for $32.7 million. 

HMC Capital says the Healthscope acquisition will boost its funds under management to $7.5 billion, up from $5.6 billion at the end of FY22.

The figure includes $4.9 million for HomeCo Daily Needs REIT (ASX: HDN), which still holds many of the original Masters properties and was bolstered by the $2.3 billion acquisition of Aventus Group in 2021.

Di Pilla, the HMC Capital CEO, says the funds manager has made headway in securing investors for the unlisted fund that will co-own $1 billion of Healthscope hospital assets with HealthCo.

“This acquisition accelerates our plans to establish an unlisted fund focused on large-scale healthcare opportunities and developments,” Di Pilla says.

The Healthscope acquisition marks another milestone for Di Pilla since he established HMC Capital in 2016 with the backing of a host of rich listers. Among the cornerstone investors of the venture were the Oatley family and Aussie Home Loans founder John Symond.

"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," Di Pilla says.