Public Services Properties Share Discussion Threads

[kenny] 20/11/2011 13:43

For those of you who are too lazy to research the current yield on care homes for sale, here are a few examples:

16.6% net profit on investment:


14.27% yield on investment:


13.69% yield on investment:


16.20% yield on investment:


13.25% yield on investment:


16.00% yield on investment:


Plenty more examples can be found, only needs a little research.

From these prices it is fair to summise that either EC is paying too high a rent or the PSPI property valuations are too high - or some combination of both.

[adam] 19/11/2011 22:32

eh, you made a claim, i asked you to give details. no worries if you don't want to or can't. the idea, i thought, of a bbs was to exchange info, not score points.

[kenny] 19/11/2011 13:03

You need to research these points yourself if, as you state, you are a large shareholder.

[adam] 19/11/2011 12:56

you are right about Elliott, the actually announced they would be taking scrip. i based my response on r.b. telling me that Elliott had given an undertaking not to buy any more shares, but i suppose scrip is not a purchase.

how do you know EC is making a loss on the homes it rents from EC?

not sure about your 9% claim, would have to see specifics to compare what you are including in net and the quality of the freehold, etc. can you offer details?

if we disregard Collier's valuation and take yours, even so current yield on Pspi valuation is far in excess of that.

[kenny] 19/11/2011 12:35

Elliott has taken shares in lieu of the latest dividend - no other holder or combination of holders has a large enough holding to account for the number of new shares issued, namely 2,925,547 New Shares were issued.

Southern Cross contracted to pay rents to its landlords and it went bust. What makes EC different is that it owns most of its properties. However, that does not detract from the fact EC is making a loss on the properties its rents from PSPI. Put differently, if EC's business was solely renting property from PSPI to operate as care homes e.g. it did not own any nursing homes, it would have gone bust by now. This is why the current situation cannot continue indefinitely. In any event, it might be that the EC group is highly geared – it is just we cannot see that gearing because it is in an offshore company; the accounts of which cannot be obtained.

Based upon current market transactions for nursing homes there is no marriage value – if you can currently buy and operate a nursing home at a 9% or more net return on capital then clearly a 7% yield valuation is too high.

[adam] 19/11/2011 11:50

i don't think Elliott can take shares without making a bid.

the value is based on Colliers independent valuation and a market price of their saleable value. i would think that given rents are contractually obliged for over 20 years on average that the running yield of some 7% does not imply a stretched valuation.

the marriage value for the tenant to become the freeholder is i think significant and would support EC+USI entity taking it over. i am sure Elliott as king maker would sell at near NAV.

there are risks though, but in the bloodbath of the elderly care sector the larger operators with good operations and higher freehold should be the last men standing. EC is i am told a good operator.

[kenny] 19/11/2011 01:33

If EC should have trouble paying its rent to PSPI, there may be little comfort in the fact PSPI owns the care homes. This is because of the method PSPI uses to value those properties. They are valued on a 'current use' basis which is a lot higher than the value of the vacant land and properties.

Even in terms of the current use value, I would urge people to research the prices for care homes which are up for sale or have been sold recently – they are a lot lower than PSPI's valuations albeit it is difficult to compare any two care homes without knowing then intimately.

Be careful with PSPI – its cash flow problems may only have been postponed by the introduction of the scrip dividend - which I suggest was only introduced so that Elliott could take its dividend in shares rather than cash. EC is also making a loss on the properties it rents from PSPI. Hard to predict what the future is for PSSPI but these two factors, in combination, cannot continue for ever to be left unaddressed. They also explain why PSPI seems to be having so much trouble re-financing the debt due for renewal.

[kimboy2] 18/11/2011 21:12

The rental business model is based on the assumption that care fees will rise faster than RPI. IMV they will in the long run though this has temporarily not been the case. However I think if homes are being closed then demand and supply will be in closer balance in the short run.

The question of if EC defaults what would be the value of the properties is interesting. I don't think that they will default incidentally.

However EC has a figure of about £40-50m (from memory) in the accounts for the value of their leases. This is the value of the business which would transfer to PSPI if EC defaulted.

The question really is how much profit are EC making per bed from PSPI. I suspect it is fairly tight and they are being cross subsidised by their other properties in the expectation that the numbers will change eventually.

Of course a lot of this apparent risk would evaporate if they were both part of the alleged USI flotation.

Doesn't seem a good time to float anything to me until the Germans get the ECB involved in a serious fashion.

[scburbs] 18/11/2011 20:06

Just be careful. What would the LTV be if EC defaulted? PSPI is just as risky as EC because of its debt. Of course if EC is fine then there's no problem (I would probably be more comfortable if all those freehold's were in the companies paying PSPI's rents or there was a parental rent guarantee, but I am not sure that it the case).

The problem with defaults is they are rarely minor (i.e. you stretch to breaking point before you default), hence the EFSF acting as a 20% first loss was never going to work.

In reality PSPI should probably proactively renegotiate the RPI increases (at a cost of a substantial valuation fall so difficult with the refi coming up). The RPI increases will push EC to default unless RPI plummets in line with BoE's constant expectations and if EC defaults it will be large (at least 30-40% off valuation IMV). PSPI should be thinking about renegotiating whilst it can, perhaps shortly after refinancing!

It's like Europe renegotiating the bail out interest rate that it charged to Greece/Ireland/Portugal. If the interest is never recoverable then the higher rate is forcing the borrower (tenant) into a larger default than would happen with a lower interest rate (rent). Ireland has a small chance of not defaulting at 3.5%, it doesn't have a hope in hell at 6-7%. Japan would be the world's biggest basket case if it had to borrow at 6-7% rather than 0-1%, much much worse than Italy.

The problem faced by EC isn't really that different to various European sovereigns (i.e. low growth - low fee increases, high interest - RPI rent increases/cost inflation). On relection EC is quite an appropriate acronym!

Something has to give and counterintuitively, PSPI shareholders should be hoping for RPI to plummet so EC can survive without a renegotiation/default. The other chance for a positive outcome is that the government has to back down and start allowing fees to increase.

[kimboy2] 18/11/2011 19:04

Well IMV the most important bit of news is being overlooked. The company said

Despite the Group's progress, the Company's shares have persistently been trading at a significant discount to Net Asset Value. In order to attempt to address the discount, the Board of Directors has resolved to commence a review of the Group's assets and the Company as a whole, and the strategic options available to maximise shareholder value. The Board is being advised on this review, which is being conducted jointly with the Asset Manager, by Smith Square Partners, an independent corporate finance advisory firm. There can be no assurances that the outcome will result in any specific action or actions, and no timetable has been set for its completion."

So what could they do ? They could sell the Swiss and US assets, but I don't think that will make much difference.

I don't think that there are many tricks they can do with financing so what is the alternative. Perhaps they could sell the lot.

USI recently said;



USI has now progressed discussions with a leading healthcare provider which could lead to a combination of their respective businesses in a jointly owned company that would be floated on AIM in London. The shares of this jointly owned company would be distributed to shareholder of USI once completed ...

USI owns some property in Leipzig and 20% of PSPI. They are trying to re-finance the Leipzig property because RBS is being awkward and doing their own revaluations.

Needless to say their shares haven't been a happy place.

I fail to see what a leading healthcare operator would see in some properties in Leipzig. However they do have 20% os PSPI and there are cross holdings between USI, PSPI, Esquire and the asset manager R.P.&C.

What are the odds on USI, Esquire/EC and PSPI combining into a new company. The strategy would be to form a care home company built upon traditional bank finance rather than a rental model which has failed.

Would the valuation of the whole be greater than the individual parts ? I can see quite a bit of risk being taken out by a combination.

[woodcot] 18/11/2011 17:31

Kimboy,

Point taken however PSPI have a different structure and it's not up to the council whether their homes stay open or close. I'm aware that anything could happen but feel at stage the company is a good bet and I'm happy to take over a 10% yield and within 24 months I believe the restructuring will lead to all the assets being sold. In house broker Artbuthnot research comments below.

Fully-let portfolio with long-term leases provides visibility. As highlighted by the interim results published on 30 September, PSPI continues to benefit from a fully-let property portfolio, a weighted average unexpired lease term of 24 years, and visibility provided by the indexation of rental income to RPI. The group remains conservatively geared, ending the period with gross debt of £142m. This translates to a period end loan-to-value ratio of 49% (H1 2010: 57%).

Strong interim results. In the first half of FY2011 PSPI delivered a 2.2% YoY increase in cash rental income to £8.5m. Reflecting improved operating efficiency and the impact of lower financing costs and reduced leverage, adjusted group earnings increased 30.7% YoY to £5.0m. Adjusted EPS rose by 15.6% YoY to 4.9p, reflecting the impact of April 2010's open offer on the shares in issue. Management delivered a 3.4% YoY increase in adjusted NAV to 148.3p.

Single tenant risk overplayed. PSPI derives 69% of its revenue from European Care, the sixth largest independent provider of health and social care in the UK. We believe negative investor sentiment towards the care home sector is adversely impacting the market's view of PSPI. However, European Care is differentiated by its owner-operator approach to healthcare provision with an increasing focus on specialist care and management appointments aimed at improving operational performance.

[adam] 18/11/2011 17:27

Looks like it is really the union trying to stir up trouble w.r.t Four seasons. (Notably they also own 60% of their homes)

"We are earning profits of circa £100m pa (before interest, tax, depreciation, amortisation). After these deductions we are left with a modest profit. We own 60% of the facilities we operate and so are not so vulnerable to rents. We continue to outperform the market trend with occupancy at 88% and admissions up against last year.

"The GMB suggestion that fees for care may be diverted to pay interest is mischievous nonsense. Four Seasons Health Care is one of the highest rated quality-of-care providers, according to regulatory inspection reports.

" Far from cutting back we plan to invest up to £28m this year and next on improvements to our homes (way ahead of the sector average).

"The GMB statements to media are significantly at odds with what their full time representatives said in numerous meetings with us when they agreed the transfer of homes from Southern Cross to Four Seasons.

[kimboy2] 18/11/2011 16:47

It is not the same as investing in the tennant because if the tennant goes PSPI still own the properties and business. There is far less risk than investing in EC.

I don't think that EC is a particular risk. Most of their properties are owned by the parent company, they have recently gained funds from this company and there is talk of a float which would presumably raise funds for EC.

The main problem is an over supply of beds and a monopsonistic market in which the LAs are the main buyer.

It needs a few more to go bust. those will be the ones like SCHE which have the great majority rented, or those that are heavily indebted.

[goliard] 18/11/2011 16:27

This seems to be the problem at the moment Kimboy2. Nobody knows who is next. Four Seasons is now on the 'critical list' too. Buying PSPI is really just the same as investing in their main tenant and that has to carry a risk warning that I don't think is fully reflected here yet. Interesting looking back at the shareprice graph, it was around 40p in early 2009. If anything sentiment is worse now on this sector than it was back then.

[kimboy2] 18/11/2011 15:59

Three homes have gone near me;



Does anyone know a source for the total number of beds nationally?

[adam] 17/11/2011 15:12

I've spoken to RB a number of times recently, also been buying heavily.

Remember, Elliott have 45% of the company and are a shrewd and sometimes aggressive hedge fund.

Elliott took part in the float at 150p and cash call at 70p recently. The shares are yielding over 12%. I think it is fair to say that they would sell out, but not at these levels.

USI, who own 20%, is part owned by European Care, who are the tenant at the majority of PSPIs homes.

It's not rocket science, there's a deal to be done at the right price. I think circa £1 (please note this is speculation on my part)

Incidentally, I am informed that USI have completed their refinancing, but strangeley there has been nothing on the Swiss stock exchange or their website about it.

[yoyoy] 17/11/2011 13:35

anybody understand the accounts?

[goliard] 16/11/2011 12:20

OK, now you have edited your post (twice now), which doesn't help.

It is obviously my opinion. Whose else would it be (unless others share it)? That is clear from my post where I say 'I'. My opinion is formed from my own experience, research and input of others. I really don't understand what you are criticising.

As to why I would post it, that is equally simple. Because I believe it. Isn't that what these boards are for?

[ptolemy] 16/11/2011 12:16

Goliard,

I have no doubt that your statement is purely speculative (note my use of 'I' - I assume that makes it perfectly valid).

Why post a statement like that, when you apparently have nothing other than a hunch to back it up? Are there any other companies you can recommend, where you can see into the collective minds of the board?

[goliard] 16/11/2011 12:12

Agreed. Just look through this thread. I don't post all my research and I doubt anyone else does either, but there is quite a lot on here that has been posted already.

[grahamburn] 16/11/2011 12:04

But surely you are able to provide some evidence or thought processes to substantiate this fact to help us lowly mortals make investment decisions.

"I think therefore I am" isn't much help to others who aren't inside your brain.

[goliard] 16/11/2011 11:47

Not sure I understand the question Ptolemy. There is no written statement to that effect from the company or it would have been posted here and indeed, released via RNS, but that does not change the fact that that I have 'no doubt'. Others may not agree. Note I have said 'I' rather than 'There is', ie the statement is personal to me and I stand by it.

The evidence that I have no doubt is the fact that I stated it, unless you think I didn't mean it?

[ptolemy] 16/11/2011 11:04

Goliard,

"I have no doubt that PSPI would be happy to be bought out at pretty much anything over the current price"

Why do you have no doubt? Where is the evidence? Thanks.

[bobdouthwaite] 09/11/2011 20:26

Potentially a bit of good news for European Care?

Sefton council care home fee freeze ruled unlawful
Bootle Town Hall The council has been told to reconsider its decision

The freezing of care home fees by Sefton Council has been ruled unlawful by the High Court.