The UK’s largest provider of residential care homes, Southern Cross, is struggling to survive. The company operates 751 care homes across the UK, accommodating about 31,000 residents. Over 20 of these homes are in Northern Ireland – the future of which is now uncertain.
A deal has been done to keep Southern Cross going for the moment, with the landlords agreeing to cut their rents until the company’s future is decided. However, that merely tides Southern Cross over until mid-October, by when longer-term decisions on the company’s operations will need to be taken.
It seems likely that if Southern Cross continues, it will operate perhaps only 250 to 400 of the homes it currently manages. A minority of the other homes will close, while the rest will be handed over to the landlords to either run themselves, or to enter into some form of management or lease arrangement with other providers to run on their behalf.
Details are very sketchy, with Southern Cross reluctant to provide any details of its portfolio of operations, or current negotiations. (See box.) There is as yet no indication of which homes will close, or whether any of the Northern Ireland homes will be affected.
Southern Cross is not alone in being a residential care home provider in financial difficulties. Several factors have undermined the viability of the sector. Increased numbers of elderly people are now supported to live longer in their own homes – an option generally preferred by the elderly themselves until they are in an advanced state of dementia or incapacity.
With a higher proportion of people admitted to residential care now terminally ill, residents tend to be there for a shorter period before they die. They also require higher levels of nursing and other staff support. These factors increase homes’ costs, cause higher churn of residents and reduce average occupancy levels.
Yet while care home costs are rising, their incomes have fallen. The Government’s austerity drive has meant that public bodies – local authorities in Great Britain and health trusts in Northern Ireland – have cut their spending on placing the elderly and disabled into residential care. At the same time, there are fewer private payers who can afford residential care because the value of their own homes has fallen as part of the property crash.
Meanwhile, many care home providers are under serious pressure from banks that loaned funds to buy properties. A decline in the value of the residential care homes has pushed some home owners into breaches of their bank covenants.
It was only last year that Four Seasons – Northern Ireland’s largest care homes provider and the second largest in the UK – hit the depth of its own financial crisis. At one point the company was majority owned by the Qatar Investment Authority – the country’s sovereign wealth fund.
The scale of Four Seasons’ financial problems meant that its main creditor – the taxpayer-owned Royal Bank of Scotland – had to write-off several hundred millions of pounds of loans and convert hundreds of millions more into equity as part of a rescue package to keep the company going. It is reported that RBS lost as much as £800m in write-offs. RBS would not confirm or deny this when approached.
Although Four Seasons has not yet completed its debt restructuring, it says it is now operating profitably and has turned the corner. Chief executive Dr. Pete Calveley commented: “The company recently successfully completed a £1.5 billion capital restructuring with circa £780 million swapped for equity and maturity of the remaining debt extended to September 2012 giving a stable capital structure.
“We are well able to manage our level of debt. We are currently reviewing options for permanent resolution of the remaining debt. Our debt and equity holders are supportive and [our] board is very confident this will be achieved next year before the maturity date.”
But there is a major difference in the business model used by Four Seasons and the sector’s largest player, Southern Cross. While Four Seasons owns over 60% of the homes it operates, Southern Cross leases all, or nearly all, of its properties. As a result, Southern Cross is now negotiating with 80 different landlords to reduce rents. Those landlords include its rival Four Seasons, while the largest landlord is NHP – which is also owned by an investment vehicle of the Qatar government.
Another of Southern Cross’s landlords – according to research undertaken by the GMB union – is a network of companies that form the Loyd’s Property Investments group, apparently owning 49 of the Southern Cross homes, of which five are in Northern Ireland. Companies in this group are registered in various countries – presumably for tax reasons – including Switzerland, the British Virgin Islands, the Channel Islands and Israel. Directors live in Poland and Israel.
Half of the ten companies in the group are now either in liquidation or administration. Grant Thornton partners are acting as liquidators and administrators of these companies. Asked about the future of Southern Cross’s Northern Ireland homes that were part of the Loyd’s portfolio, a spokesman for Grant Thornton said only: “Loyds Nursing Homes Group is the landlord of 64 nursing homes, 53 of which are Southern Cross Homes. Grant Thornton was appointed administrator of the Loyds Nursing Homes Group on 19 April 2010. The administrator’s priority is to make sure that the interests of the residents are looked after at all times.”
Southern Cross was bought in 2004 by the Blackstone private equity house, which listed the company on the stock market in 2006 – achieving a 400% return. Soon after it was listed, its market value rose to £1.1bn – now the share price has crashed and its market value is a mere £9m. The company owes a reported £20m to tax authorities, it cannot afford the previously agreed rents, nor can it repay large debts to lenders, including Barclays and the taxpayer-rescued Lloyds. Southern Cross landlords apparently have massive debts with the two taxpayer rescued major banks, RBS and Lloyds. Any long-term resolution of Southern Cross’s problems may therefore involve – as with Four Seasons – write-offs from the taxpayer funded banks, or conversion of debt for equity.
The arrangements entered into when Southern Cross was owned by Blackstone have caused much of the difficulties that the care home operator is now in. Blackstone aggressively grew Southern Cross, but did so at little cost to itself by financing acquisitions through the sale and leaseback of the properties. So convinced were Blackstone by the favourable demographics of an ageing population with higher social care needs, that they entered into over-optimistic rent agreements which included automatic annual rent increases above the rate of inflation. Southern Cross needs bed occupancy of at least 90% to cover its costs, but at present its occupancy levels are significantly below this.
Blackstone was by no means the only private equity house that entered the residential and nursing care home sectors – several others did, as well, often using aggressive business models with high levels of debt gearing. While these are not as exposed as Southern Cross to the cut in public sector spending, they are also finding the current operating environment increasingly challenging.
The crises that have afflicted Southern Cross and Four Seasons are unlikely to be the end of the story.
Box
Southern Cross in Northern Ireland
A spokeswoman for Southern Cross declined to state how many homes the company operates in Northern Ireland or who its landlords are in those homes. Southern Cross’s website suggests there are a total of 21 homes it operates in Northern Ireland. According to the GMB union, five of these homes are owned by companies associated with Loyds Property Investments Ltd, which is itself in the process of being liquidated.
· Paul Gosling is author of ‘The Rise of the Public Service Industry’, which was published by the Unison trade union in June.