Care homes operator close to collapse after rents soar

A company whose care homes look after more than 30,000 vulnerable elderly residents was close to collapse yesterday after being hit by spiralling rents and a decline in fees.

Shares in Southern Cross Healthcare fell by more than 50 per cent after it said it might break its banking covenants. The company, which owns the Southern Cross Healthcare and Ashbourne Senior Living brands, also revealed it has appointed advisers at KPMG to help it negotiate with landlords and lenders as it tries to stave off "an impending banking covenant breach".

Southern Cross does not own the freehold to the vast majority of its 750 care homes. Around 250 are owned by city bond holders – including the Qatari Investment Authority (QIA), which bought them from a private-equity company five years ago.

Since then, the amount Southern Cross has had to pay in rent has risen by nearly 20 per cent to £248m a year despite a falling rental market. If the firm were to go bankrupt, the owners of its care homes could repossess them – potentially forcing the mass re-housing of residents.

Union critics claim it is mainly the high rents being paid by Southern Cross which are directly impacting on the levels of care the firm is able to provide as it tries to cut costs and stave off bankruptcy.

Over Christmas, a nursing home in Luton, run by Southern Cross, was closed by the group because conditions were so bad. This month the company was forced to install a new manager at a care home in Telford after failing basic inspections by the Care Quality Commission.

Research by the GMB union suggests that the extra money Southern Cross is paying in rent amounts to £60 a week per care-home bed. It comes at a time when local authorities are trying to reduce the amount they pay to look after elderly residents in care homes by 6 per cent a year.

Southern Cross was built up by the private-equity company Blackstone in the early part of the last decade, mainly through acquisition. In 2006, Blackstone floated the company but sold part of its business called NHP – which owned many Southern Cross properties – to a company called Delta Commercial Property, which was owned by the QIA. Just over £1.17bn of debt held by NHP was sold by the Qataris to investors, packaged as asset-backed bonds and subordinated debt.

Since then the GMB union says that the rents paid by Southern Cross for the homes has risen to £6,444 per bed compared with just £5,435 in 2006 – a rise of 18.6 per cent. The rents are now set by Capita Asset Services on behalf of the NHP bondholders.

"It's a disgrace," a spokesman for the GMB said. "Southern Cross is being grossly overcharged in rent and this cost is being passed on to pensioners and local authorities."

In a statement, Southern Cross Healthcare confirmed the GMB's figures and said it had long-term rental agreements for most of its care homes, either on a fixed annual escalator of 2.5 per cent or tied to the Retail Prices Index, which was even higher. "We are already on record as proactively seeking to revisit the terms of these agreements so that they more accurately reflect the deterioration of market conditions," it said.

The QIA said it was not responsible for setting the rent and now only had a small holding in NHP.