we're building China's first healthcare REIT, can you help?

earthwalker7's picture
Rank: Almost Human | 6,766

This is a chance to do good in the world, save some lives, and make an impact.

4 years ago I and a couple partners created a private hospital company in China.
We acquired our first hospital, and then last year, acquired the second hospital.
We raised and invested about $100mn.
Now we're running into some struggles.
We have sunk a lot of money into physical property and capex.
Property in the area has doubled in value, so we're sitting on a fair bit of equity value.
We have no debt.
The hospital is organized as a holdco, owning an opco, owning a propco.
We employ 150 staff, mostly physicians.
We have thousands of patients see us, but still too few to be anywhere close to break even.
We're mulling over some potential next steps, including:

  • raising traditional bank debt, collateralized by pledges of the hospital properties
  • we are currently in process of separating the opco and propco with the aim of creating China's first healthcare REIT. The idea is to give lower-yield investors who want the security of investing in real estate to invest in the hospitals. The hospital opco would then be a separate company, running the hospitals. The opco is what most of the growth capital funds we've spoken to are interested investing into, because it's more asset light and would likely be more rapidly growing
  • we could raise a SPAC perhaps -something suggested by one of the folks in WSO. I know nothing about this path though
  • so far, raising money for this entity (beyond the $100mn) has been challenging.

I am interested in getting helpful advice on how we should steer this ship.
I'd be especially keen to hear from those on the WSO who have hospital experience or healthcare IBD or PE, so I can bounce ideas.
This is a chance to do good in the world, save some lives, and make an impact.

Comments (34)

Aug 19, 2018

I've done hospital work in Europe but not in Asia. I can perhaps give some sort of advice but I would like to know, how is the healthcare market in China when it comes to hospital? Mainly Gov or private? Any large hospital groups? generalist hospitals or specialist ones?

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Aug 19, 2018

Hey GI,
Historically most of the healthcare has been public, but about 6 years ago the gov started a nationwide healthcare reform policy.
That policy has been comprehensive, across pharma, device, delivery, insurance.
One of the reasons we've been able to buy the hospitals relatively cheaply is because the government has been selling off select public hospital properties in order to accelerate the private hospital market, and set up a second pathway for healthcare delivery.
There are many specialist and generalist hospitals.
Our hospitals are private.
The smaller one (100 beds) is open and does outpatient, inpatient, and surgeries (mostly ortho).
We have a 450 bed hospital that is undergoing renovations and won't be open until 2020.

    • 1
Aug 19, 2018

Ok perfect, and how is the market in terms of players? 1-3 large private groups? highly fragmented?

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Aug 19, 2018

What's your yearly comp?

Aug 19, 2018

I'm not being compensated for my work with the hospital.
I have a full-time job in PE though, totally unrelated to the hospital, and it pays 200k.

Aug 19, 2018

Honest question - how do you have the drive to do this hospital work when you're already at 200k/yr?

Aug 19, 2018

I'm not sure I follow the question.
200k is not that much.
And I want to build this hospital business, and turn it into a successful company that helps improve China's healthcare situation and answers a real market and social need.
We're building a company, a team, that can improve the lives of tens of thousands, maybe one day millions of people.

Aug 19, 2018

What do you see the exit worth?

Aug 19, 2018

Thanks a lot for giving us the opportunity to discuss those matters!

As I student I am not qualify to help you but I wish you the best of luck for this project

However I am pretty interested in real estate/developpement in Asia and do you think it is possible to land a job in Hk/Singapore in those fields?

Have a nice day!

Aug 19, 2018

Chinese or other local language skills is generally required.
But real estate investment and development have lower localization hurdles than general industry PE, so maybe have a chance.

Aug 19, 2018

For getting a job in Asia, assuming you have the requisite language skills you can try the following.
1) apply for jobs and contact recruiters at efinancialcareers.com.hk
2) come to Asia during summer, winter or spring break and try to tag along with the MBA 'days on the job' corporate presentations
3) do internships in Asia. Apply to companies directly to get those, or check efinancialcareers as noted above.

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Aug 22, 2018

What if you're trying to get into PE but don't have a lick of language skills. I'm assuming Singapore is the only option?

Aug 19, 2018

I'm not super experienced in this, but interested in what you're doing. A few questions I have in general that may/may not be helpful:

  1. are you looking for onshore RMB investments? How would USD investors come in - seeing tax issues and questions on getting capital offshore? Rqfii channel?
  2. regionally where are these underlying properties? Is it collateralized on real estate or equipment or both?
  3. What is the current investor base? I'm assuming it's mostly onshore investors.
  4. Not sure if this will be relevant for a REIT, but from a debt perspective, if there is a "default" of any kind, what are the convenants around it? Aka, what is the disaster recovery case?

And my last question is market concerns in general, not related to the structure: how do you make the case for Chinese hospital real estate? Many literature out there is calling a bubble on Chinese real estate.

Aug 19, 2018
  1. are you looking for onshore RMB investments? How would USD investors come in - seeing tax issues and questions on getting capital offshore? Rqfii channel?

we can take either/both, as we have onshoring capability through approved QFLP allocation

  1. regionally where are these underlying properties? Is it collateralized on real estate or equipment or both?

our two hospitals are both in a tier 2 city in the Pearl River Delta in Guangdong

  1. What is the current investor base? I'm assuming it's mostly onshore investors.

a mix of onshore and offshore individual investors, and a 30% stake sold to a publicly listed healthcare company

  1. Not sure if this will be relevant for a REIT, but from a debt perspective, if there is a "default" of any kind, what are the convenants around it? Aka, what is the disaster recovery case?

no idea

And my last question is market concerns in general, not related to the structure: how do you make the case for Chinese hospital real estate? Many literature out there is calling a bubble on Chinese real estate.
[/quote]

Well we bought several years ago, so we're up 2x. Can't just jettison the hospitals we already bought just because of short-term valuation movements. We're building a company, not short-term investors.

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Aug 19, 2018

In the US, it's 60% who you know, 40% what you know.
In China, it's 95% who you know, and 5% what you know.

Aug 19, 2018

ok how do we harness that?

Aug 21, 2018

And then they still might just take your shit one day

heister:

Look at all these wannabe richies hating on an expensive salad.

https://arthuxtable.com/

Aug 20, 2018

I'm a CDO manager working in China. I'm curious about the structure of your REIT. Do you plan to structure the REIT in China or overseas market? As you may know, China does not have REIT as a legal concept. To create a REIT, you'll need to set up a private fund to buy the building or to write loans to the hospital, then repackage the shares of the fund into an ABS to be traded in the exchange. We call it quasi-REIT. But in the current regulation, exchanges might not approve the issuance of healthcare quasi-REITs, especially not with assets of a start-up as collateral.

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Aug 20, 2018

Interesting insights. Happy to learn more.
I had thought that the laws had been modified recently.
I can PM you.
I'm not overseeing the REIT creation per se.

Aug 20, 2018
Most Helpful
Aug 20, 2018

@earthwalker7 I PM'd you already, as I'm definitely game for discussion.

I would explore an MLP structure as well. If you're running this as an NFP, I don't think you'll see much value from a Tax standpoint with either the MLP or the REIT. With a REIT, you'll need to change the entire structure so that the hospital leases the facilities from a TRS. The catch is that the TRS needs to be managed by an independent 3rd party. Then there's also the loss of control on the real assets. That may be a problem, especially on appreciating property values. With an MLP, you can retain ownership through a GP/LP structure and sell the LP shares on the market. The MLP has flexibility in distributions (governed by the partnership agreement and not regulation), strong control and good potential for growth, but has an underlying tax issue - being taxed more than you should. Are you looking to do this (a REIT or MLP) on the US Market or the Chinese markets? I think the strategy changes depending on how you handle that. I don't know the regulations in China, but if @HoggieT is right, doing it in China as opposed to the US may be harder to do. Following the US structure may be easier.

As far as growing the business from the services side, I know nothing about insurance and reimbursement in China and have a few questions about the T2 cities you're in. Are these large cities (Think major cities in a T2 region) or smaller areas? Are the hospitals the equivalent of a Level I/Level II Trauma center in the US or are they Level III/Level IV. Are all the surgeries performed done by hospitalists or is there a private practice component? I know you said your caseload is mostly Ortho, but can you be a bit more specific (ie Joint vs. Ortho-Spine vs. Ortho-Trauma)? Are you looking at expanding the surgical mix, as that can drive revenue, increased patient care, Likewise, are you looking at same-day outpatient treatment centers as well? I know, tons of questions,

Aug 21, 2018

thank you Frieds.
Really appreciate the good advice.
I'll look into MLPs.
Not sure if these structures are available in China.

Aug 21, 2018

I don't know if the REIT or the MLP can be done. I think that if you do them, it ends up being all offshore funding. As I said, let's move this to PM because I think we'll get way off track on this discussion since there is so much to discuss.

Aug 21, 2018

Sounds like you guys are at the level of needing professional & local advice - can your partners bring on lawyers and the like? You are getting some pro bono here, thanks to the good people of WSO

Aug 21, 2018

We have advisors. Both lawyers and bankers.
And most of us ourselves were senior bankers and PE professionals.
The chairman was head of China for a big Wall St. ibank, before starting and running their China PE practice.
But this is not so easy a case to raise for.
Reality is often more difficult than textbook.
We also do have lawyers, but they can't really advise on the best locations for getting capital.
Lawyers are documenters.

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Aug 21, 2018

I can give my 0.02 but it wont be much. Honestly raising capital should be basically a lost cause at this point, so debt might logically be the next move. A SPAC would be a good alternative. However, regarding debt, I am not sure if you will be able lever up without paying fierce interest rates due to the uncertainty surrounding any general business in China and the riskiness of businesses in the healthcare space. It could be worth a go, but if you down the debt path prepare to shop around a lot.

Aug 21, 2018
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