Britain’s biggest mental healthcare chain the Priory agreed an £800m sale-and-leaseback deal as part of its recent takeover, which has lumbered the business with higher rental costs and could affect the services it provides for the NHS.
The Priory was sold by Acadia, the US-listed mental healthcare provider to the Dutch private equity firm, Waterland, in December for £1.08bn. But the complex debt-laden deal is almost entirely financed through the sale and leaseback of some 40 of the Priory Group’s hospitals to a US property fund, the Medical Properties Trust (MPT).
The agreement burdens the Priory with significant rental costs of about £50m a year, and a minimum annual increase of 2 per cent, according to three sources close to the transaction.
Roughly 10 per cent of NHS mental healthcare beds are provided by the Priory, and demand is expected to increase as a result of the Covid-19 crisis.
Advisers and NHS commissioners close to the deal warned that any increase in rent could force the Priory to raise the fees it charges the NHS and private patients, or make savings elsewhere.
Nick Hood, a healthcare specialist from Opus Restructuring, said: “The government should think very carefully before pouring public money into such a risky financial structure. It must obtain suitable guarantees that scarce healthcare funds are not diverted from the front line to finance such a lucrative deal for the property investors.”
Sale and leaseback deals split the ownership of the assets from the operational management of the hospitals. They have drawn criticism after Southern Cross, which provided care homes for the elderly, collapsed in 2007 partly because a rise in rents made the business unsustainable.
Four Seasons, another large care home chain, is owned by creditors after being loaded with debt.
The Priory faces other cost pressures including the need for investment in properties, paying for Covid-19 related personal protection equipment such as masks and gloves, and higher staff expenses as a result of a UK-wide shortage of nurses.
Acadia, which bought the Priory for £1.3bn in 2016, had been trying to sell the business for more than 18 months.
Waterland put less than £100m of cash into the purchase, while MPT took a 9.9 per cent stake and provided a £250m bridging loan.
MPT owns hospitals operated by Circle and Ramsay in the UK, which had their costs — including rent, external interest payments and staff — paid for by the British government during the first wave of the pandemic after patient numbers dropped sharply during the spring lockdown.
Edward Aldag, chief executive of MPT, which has grown its UK assets to about £4bn from £100m in 2018, said he was “elated to rapidly expand . . . our exposure to the increasingly critical behavioural health hospital segment at what we believe to be a very strong return.”
Waterland owns a similar, larger business in Germany — Median Klinik — which has 120 facilities providing mental healthcare, rehabilitation and addiction treatments. Median Klinik has had a sale and leaseback agreement with MPT for the past six years.
Investment bank Rothschilds advised on the Priory sale. The £1.08bn price including debt was some 8.5 times the group’s underlying earnings in 2020.
The Priory and Waterland declined to comment.