A UK news report that appeared on former Blackstone portfolio company Southern Cross was inaccurate and misleading.
Blackstone, which manages assets on behalf of its investors, has not controlled Southern Cross since its IPO five years ago in July 2006. As with any investment formerly owned by the funds we manage, Blackstone was not responsible for the wider economic climate and controlled neither the debt levels nor any additional transactions entered into by the newly independent public company. While we can’t speak to decisions the company has made since our ownership ceased in March 2007, or to the impact that the global economic downturn had on Southern Cross and its peers, we can explain Blackstone’s role in the company’s history.
Blackstone invested in Southern Cross to create a high quality care home operator of scale that was professionally managed and a responsible member of its community. At the time, the UK care home sector was highly fragmented and facing more demanding quality of care requirements. Blackstone believed consolidation of the care home sector to create an industry leader, focused on quality of care and high quality operations, was a sound thing to do.
Blackstone’s investment thesis was predicated on growth, investment in the management infrastructure of the business and on the creation of a company with a reputation for quality: a company viewed as a responsible operator by its local authority funders and its residents.
Blackstone made a positive return for its investors on this investment because it helped to create a sector leader which was successfully floated on the London Stock Exchange. After the IPO, Southern Cross’ share price nearly tripled.
Recent media statements unfairly suggest that Blackstone created problems for Southern Cross by buying large businesses that owned its real estate, imposing unsustainably high rents and selling the real estate at huge gains to Blackstone; thereby leaving a company incapable of operating successfully and unable to invest the required capital and management resources in the business. These statements are inaccurate. The vast majority (approximately 95%) of the homes of the three principal businesses consolidated into Southern Cross operated under leases that already existed prior to Blackstone funds’ investment. Additionally, many operators of care homes in the UK dating back to the 1990’s did not own their real estate (just as most retailers, restaurants and cinemas do not); Blackstone did not create the care home operating company model.
Prior to and after the IPO of Southern Cross, the company pursued incremental growth by leasing new homes from developers or property investors; buying small groups of owner/operator homes and selling on the property; or taking over the operations of already leased homes. During Blackstone’s ownership of Southern Cross, a limited number of homes were acquired in each of these ways.
A detailed review of Blackstone’s investment in Southern Cross concludes that Blackstone did not burden Southern Cross with self serving sale/leaseback financing. Blackstone acquired Southern Cross in September 2004, an operating company managing 162 homes, of which the vast majority (142) were leased. Leases dated back to the period (1992-1996) when most of the homes were constructed. Blackstone did not create those leases.
Several months later, Blackstone bought NHP, a publicly listed company that owned two businesses: NHP, a securitized property portfolio and an operating company, called Highfield Care, which operated 192 homes. Highfield operated homes leased primarily from NHP under leases which were created years before Blackstone’s acquisition.
Blackstone’s rationale for acquiring the NHP group was to combine Southern Cross with Highfield to create the UK’s largest care home operator.
Before, during and after Blackstone’s ownership of the NHP group, the NHP property portfolio was held separately (and had separate stakeholders in the form of bond holders) from Highfield, and Highfield paid rent to NHP – again, Blackstone did not create this structure and did not create the Highfield leases. In fact, just before Blackstone acquired the NHP group, the company had announced a process to sell Highfield Care.
Southern Cross merged with Highfield, and several months later, Blackstone sold the NHP property portfolio in two separate sales: one to RBS and the other to a property group, Loyds. Additionally, Southern Cross sold and leased-back the real estate underlying the 20 freehold homes that it had previously owned in a transaction with Prestbury. The terms of those leases were market based and similar to the inherited leases of the Southern Cross and Highfield homes.
Finally, in November 2005, Southern Cross acquired the operations of Ashbourne Care, an operator of 190 care homes. Shortly before Southern Cross’ acquisition of Ashbourne, the company’s previous owners had sold its real estate to property group, London and Regional.
While growing the platform through acquisitions, Blackstone also demonstrated prudent management of Southern Cross in reducing the company’s debt with proceeds from the IPO; after which Southern Cross had relatively modest debt of approximately £65 million, or 1.5x current year EBITDA
During the period between Blackstone’s acquisition of Southern Cross in 2004 and the IPO in July 2006, the business significantly grew its revenue and profits, both organically and through acquisitions, and was widely viewed as a high quality, responsible operator. Blackstone helped Southern Cross do what it did best – operating quality care homes.