Orpea, the French care home operator, has consistently generated ~10% annual topline growth, having acted as a highly selective consolidator in Europe for over a decade. But the tide is about to turn. The company can no longer afford acquisitions as it is desperate for cash to clear its steep maturity wall and to refurbish its shrinking asset base, the only source of growth in the medium-term. A large pot of new money from the banks (up to €3.23bn, with only €1.73bn committed so far) and a large sale-and-leaseback (S&LB) plan (€2bn) are hailed as the answer to its immediate liquidity problems. But we see pitfalls further down the line.

Jump in portfolio valuation driven by M&A

The value of Orpea’s owned property portfolio palpably increased from €6,969m in FY 20 to €8,069m in FY 21. While in absolute terms this €1,100m YoY jump might seem like a lot, it is not problematic because in relative terms the share was stable at 41-43% of total assets. The majority of that increase (€833m) was driven by acquisitions of properties in Ireland and Australia. The remainder was explained by the -9bps reduction in the cap rate used to value the properties (from 5.36% in FY 20 to 5.27% in FY 21). This level seems reasonable and on the conservative end of the cap rates used for prime healthcare assets, which range from 3.25% to 5.5%, according to Knight Frank.

The auditor Deloitte said they paid particular attention to the property valuation, highlighted as a key risk, and concluded it is sensible. They assessed the independence of the Real Estate appraisers (Cushman & Wakefield, JLL and CBRE), the reasonableness of their assumptions (in particular concerning cap rates and expected rental income) and stress-tested their valuations. Deloitte has been auditing Orpea for 15 years so should be familiar with the valuation models.