Nursing Home Properties brought back from the brink

David Lawson 2002


Bill Colvin is looking cool and composed. Only later does it leak out that there had been a contretemps over something in the office that morning. But he must be used to handling upsets by now. Over the last couple of years the phones at Nursing Home Properties have come close to melting point as investors fumed, tenants collapsed and the share price dived.

  Somewhere in the middle of all this Colvin supposedly left for a new job, changed his mind a couple of times  and finally came back to take the helm of Nursing Home Properties. ‘But I never actually went,’ he insists.

  Instead, he has doggedly pursued a rescue plan which brought NHP back from the brink of extinction and won top spot in Property Week’s share performance league with a 187% rise last year. ‘We were coming up from a low base,’ he protests. ‘If we  are in the same position next year, I will be pleased.’

  Such modesty will go down well with investors suspicious of hype over health care matched only by dot.coms and serviced office operators before the fall. It all looked so promising a couple of years ago. NHP exploded into headlines as part of an exciting new sector which would give fund managers what they craved: liquid investment based on cashflow from property created specially for a booming sector. The logic appeared impeccable. Buy or build top quality buildings: let to iron-clad covenants;  then securitise to feed a happy band of bondholders free up capital for further expansion.

  At first the formula appeared to work. Two bond floats and three share issues raised almost £450m within two years of winning a full listing in 1998. But doubts were already being raised about potential flaws in this logic. Peter Champness, chairman of the European Group of Valuers Associations and director of nursing home consultant LCS, raised eyebrows by going public with criticism of valuations, pointing out that they contained no allowance that certain tenants might not be able to afford the rents.

  NHP protested that they had worked to the same rules as everyone else, and JP Morgan weighed in with hefty research to show that any shakeout of tenants would release space for even better ones.

  But sentiment for the sector began to fade when major players like Lend Lease, MEPC and Credit Suisse pulled  out. Then, as if to justify the doubts, leading NHP tenants began to fail. Three went down within nine months and by the beginning of 2000 NHP’s  banks called a halt to further acquisition. Consultant KPMG went in to find an escape route.

Having only joined NHP in February 2000  Colvin quickly discovered his way out to Jarvis,  the  support services group. But he held off, working part time as finance director to find a solution. When co-founder Richard Ellert left , he moved easily into the chief executive role.  For the last couple of years,  he seems to have spent most of his time in smoke-filled back rooms trying to sell the company,  but appearances are not necessarily what they seem.

    Amazingly, the original investors have stood firmly behind the company throughout this chaos. The share register looks as strong as a blue-chip property giant with names like Schroder, Invesco and Canada Life on board. It has even acquired newcomers like Gartmore, Norwich Union and Morgan Stanley, so pressure to sell has not come from that direction.

  But that is a testament to Colvin’s vision  rather than the original business plan, which has gone disastrously awry. There were never enough quality tenants to make it work – and there never will be. Another weakness was that operators had no equity stake. When things went wrong, they just handed in the keys.

  NHP is taking that opportunity to rationalise the number of tenants and cut overheads. It has also set up  a care services division, strengthened by the acquisition of Highfield,  to fill the gaps. For the next few years profits will still come mainly from rents but after that he expects a more even balance with fees from providing  nursing care. He may even begin selling those services outside the group.

  In other words,  NHP will no longer be only a property company, which will cause some problems in the City, where they like their babies clean and simple. But Colvin is unrepentant, and slightly bemused that anyone should want to focus on bricks and mortar. ‘The added value to our buildings comes from the services they provide,’ he insists.

  Colvin only stayed because he was given this leeway to change direction and   the company is no longer up for grabs. In fact, it was probably off the table long ago but Colvin had to go through the motions. ‘If I thought it was the best return for shareholders, I would have sold,’ he says. Much of the gossip over the last couple of years was unsubstantiated. Admittedly, offers came in that he had to consider, but they were rarely realistic.

  Only last summer Morgan Stanley and Reit Asset Management, one of the few property players still in healthcare, were said to have been close to a takeover. They are understood to have  offered more than the share price but put conditions on the deal that were unacceptable, says Colvin.

  Southern Cross Healthcare was also touted as a new owner but Colvin refused to merge  cheaply. He did, however, work a deal which made Southern Cross his biggest tenant. ‘We had bought 19000 beds in three years and a lot of property was let to people who were not up to the job,’ he says. ‘Southern Cross was an exception. It is a top-class operator.’

  Now that talk of selling is out of the way the priority is to continue building on a recovery which saw losses of almost £14m turned into pre-tax profits of £10m in the year to September 2001. But Colvin still has some way to go before feeling comfortable servicing £95m of debt and ensuring bond holders get their £37m a year. There is still, for instance,  the small matter of sorting out £10m worth of unpaid rents a year in the £590m portfolio.

  Underperforming property has already been sold. NHP took a hit of £40m last year on losses from these disposals. But Colvin prefers expanding out of trouble. ‘I would like to add another 50 homes to our  380 over the next three years. That would give us critical mass to complete a fourth securitisation.’

  Despite the sector’s problems, Colvin sees huge potential because the public sector has not kept up with demand for high quality nursing care. A further massive shakeout is due as new rules on minimum standards for care homes come into force which will force non-compliant space off the market. ‘We have an advantage, as almost all our homes meets the new conditions,’ he says.

  NHP also has the money, as banks and shareholders take a more confident view.  Before developers begin salivating, however, NHP has enough land to provide another 20 of those homes, as well as to expand existing sites. Nor is Colvin committed to running cap in hand to developers. ‘We could provide the property.’ He says.  ‘It’s not the world’s most difficult task, is it?’

 He has a tenant’s view that the property industry is not that good at providing the right kind of space. Nor does it appreciate that value is not some innate virtue but comes from the tenants’ skills, reflected in turnover rents.  That was a bitter lesson which almost brought the company down. It is not something he will forget in a hurry.  

£m                                           2001                2000                1999                1998

Turnover                                  76.6                 70.9                 49                    25

Pre-tax profit[loss]                    10                    [13.7]               18                    7.8

Mkt Cap                                  95.7                 44.2                 260                  213

£m                                      Sept 01                   Sept 00

Unpaid rent                       [10.3]                                [9.1]

Exceptionals                        [4.7]                              [28.9]

Operating profit                  50.6                                25.7                     

Interest                            [40.2]                              [39.5]

Earnings/share                   8.7p                                 [11.34]

NAV                                 70.1p                               55p

                   2002                           2003

Estimated earnings/share

UBS Warburg  [BUY]                   8.59p                     9.68p

Collins Stewart [BUY]                   9.30p                     5.80p