Four Seasons Health Care Bankruptcy

Just looking at Four Seasons, for example, in the last 2018 officially audited results, you’ve got £640m roughly in revenue, and that’s a 90% occupancy, which is pretty good. The payroll is 65% of revenue, so just over £420m. Rent is £50m and interest costs at £140m per year. Is this business financially stable without that debt? It’s quite possibly, but I guess it goes back to the question that there’s no provider of this capital in the first place to be willing to take the risk to own the asset.

Absolutely right. That’s a huge debt burden to have to finance. This Four Seasons business, although it’s got high occupancy, the lion share of that occupancy is residents that are funded by the state, who is commanding a relatively low fee. At the outset, the investors gambled on the business being so large that it would be able to command increases in fees even from government because it would leverage its purchasing power. The reality is there isn’t sufficient money in the government system to enable that to happen, and therefore the original business model—the appraisal that was done—is fundamentally flawed in that regard because it just assumed that government would cave in and increase fees. The Government can’t because it’s only attributing so much cash to health and social care.

And that’s where they have a high coupon rate on the debt and also why they tend to split the business up and give them that opportunity to do sale and lease backs of the property to extract cash.

You tend to find that the more successful businesses are the businesses that find the right balance between attracting self-funded residents while still also providing for residents on behalf of the state. That’s where they get the right balance. They also get the right size. Big isn’t best. I’ve had this discussion many, many times, with my background and talking to people in the sector, about what is the largest size of adult residential care business that the market can sustain. The general feeling is certainly no more than 150 care homes. That would be the biggest that anybody would be able to run successfully. Anything above that, which includes Four Seasons and probably 1 or 2 others as well, will be struggling. Because it’s not like running a retail business. Every care home is operating in its own discreet market with its own discreet supply and demand dynamics. It’s a much more difficult business to run than purely retail.

What were the differences between Four Seasons today and Southern Cross bankruptcy in 2011?

Four Seasons is effectively funded by debt and therefore the business has to make sufficient money and drive sufficient cash through the business, in order to be able to service that debt through interest. You mentioned £140m. That’s an awful lot of interest to have to pay. Southern Cross was slightly different in the sense that it was thought at the time to be a very sexy model and the route forward for big care-home businesses. That model was, separate the operation from the property—buy business, sell the property, run the operation, and just pay rent on the properties. The problem is, it all boils down to the same thing and the same reason, is when they did their business model, they assumed that the business would be of such a size that they would be able to command fee rates from government through bargaining power, or increase it through bargaining power. That would be sufficient to be able to pay increases in rent to which they contractually agreed to do. Instead of paying interest on loans, they’re paying rent, but fundamentally they’re thinking the same thing: that size will give them the ability to drive purchasing power. And it didn’t happen.