Public Services Properties Share Discussion Threads

[kimboy2] 03/5/2012 09:35

Hi scburbs
I took the starting point the statement in the 2011 finals;

EC's turnover for 2011 is expected to total approximately £140 million (2010 - £124 million) with an expected EBITDAR, before central overheads, of approximately £40 million (2010 - £34 million)

Now the outturn for 2011 will be less than projected because of the various issues identified in the PSPI finals.

However if we take £40m EBITDAR as a steady state profit then;

a) No rent
b) Debt of £300m (£100m PSPI & £200m Esquire) and interest payments of £15m
c) EC depreciation is £3m
d) Central costs of say £7m

You get £15m.

Lots of ifs and buts. However my central point is that non UK more than covers the present price and the UK assets are not worthless.

[scburbs] 03/5/2012 09:10

Kimboy2,

Wow, PBT of the combined entity of £15m! I was putting my money on perhaps breakeven at best (i.e. profits in PSPI being matched by losses in EC).

How did you come up with £15m PBT? I can believe the NAV of the combined group will be solid (initially), its the profitability that I would be worried about.

[kimboy2] 03/5/2012 00:33

The healthcare property investment market, like other investment classes, has been buffeted considerably by political and economic uncertainty. The last half year has seen very few large investment deals, with the impact and publicity surrounding the demise of Southern Cross, certainly having an adverse effect on the market. Investors continue to look at opportunities, but levels of due diligence related to operator performance has increased substantially. Headlines stating weakening occupancy trends, uncertainty with respect to local authority referral rates and fee levels and erosion of operating EBITDAR have all contributed to the perception of a weak market. Investment yields have drifted out for good quality secondary assets and operators to 7%+, although the prime end of the market is stable at around 6% to 6.25%. Debt finance remains very restrictive with maximum LTVs at around 65%. Development finance is generally absent from the market. At the same time, the elderly population in need of residential care has increased by around 65,000 over the last year according to census estimates.

[kenny] 03/5/2012 00:22

Kimboy2 -
If you truly believe that the "new NAV will be about 77p" then you should really sell everything you have and invest it here.

For the UK assets, with £12m of net operating income pre interest, valued at a 12% yield which is the rough yield being achieved in the real world, that gives a value of £100m compared to debt of £101m. So there are no net UK assets.

The yield at which care homes are being sold in the real world e.g. on an average yield of 12% suggests a gross overvaluation of the UK assets - £185m as opposed to £100m. So turning to the overseas assets there is every reason to assume the same has occurred there, not least with the closure of hundreds of US post offices. The fact PSPI have not been able to sell a single asset – UK or non-UK in quite a few months of trying, does suggest there is a problem with the values, once again, in the real world. If you fall for the company line that potential purchasers could not obtain loan finance, then you must accept the same problem applies for a PSPI refinancing, in due course, of the non-UK assets.

Looking at the non-UK assets another way - taking the company valuation of £76.7m would you agree they may be overvalued considering they only produce net operating income of about £1.3m a year? That is a yield of 1.69% and is not going to cover interest on the related loans.

Figures for net operating income stated above comprise, £17.242m of revenue less operating expenses of £3.939m leaves operating income before interest of £13.303m. The £13.3m of net operating income is allocated, per your figures, as to £12m relating to UK care homes leaving only £1.3m applicable to non-UK assets. All of these figures are also before tax.

In summary, the company's accounts show assets of £261m producing an income of £13.3m – so a yield of 5.09%. At that sort of yield its not really worth getting out of bed. Put another way, interest on total debt of £142.2m is going to eat most of the £13.3m, and after tax on the income, would leave nothing for shareholders by way of dividend.

Finally, none of your comments acknowledge the fact that PSPI's assets are of the type that will likely continue to reduce in value, perhaps for the next two years or more. Therefore, any bank advancing the 70% loan you suggest they might, is not really doing its job very well.

[kimboy2] 02/5/2012 21:50

Hi kenny
I think the first thing is the structure of the company. It would appear that all the non UK assets and some of the UK assets are outside the potential merger.

PSPI could therefore consist of these non UK holdings and a minority holding in an unquoted carehome company.

The gross assets of the non UK is £76.7m and the liabilities are £40.8m.

These assets are to be sold. If the cash from these is to be less than the present market cap then the value of these assets will have to fall by a further 25%.

That may happen of course. However they have been testing the market and I suspect that the valuers would have honed in on the valuation of the interest they have received.

Now the carehome assets are presently valued at £185m and the loan is £101m giving an LTV of 54,5%. Esquire probably has assets and debt twice this amount.

If we assume that there is no additional equity being raised then the question is what LTV would the bank lend on. IMV 70% is a maximum which would imply a valuation of about £147m and equity of about £45m.

Assuming that Esquire is the same size/debt this would give a group equity of £135m. I reckon the PBT of the new group may be about £15m and that would put it on a P/E of about 10.

It is not great seeing they are getting £12m revenue at present but it would clearly not be worthless.

If any of this turns out to be correct then the new NAV will be about 77p.

As for delisting it is obviously possible. However I would have thought it more likely that ECG woud put in a derisory bid for the PSPI care home assets.

Anyway I think that there is value in the non UK assets which more than underpins the present market cap, and the care homes provide upside from that.

I think it is a good risk/reward at these levels. I could be wrong though. We shall no doubt see.

[kenny] 02/5/2012 20:05

Kimboy2, in your view, if I buy shares in PSPI at today's price what is my a)
potential exit route, b) likely minimum period I would need to invest for and c) likely annualised return over that period; the annualised return expressed as a range bearing in mind the uncertainties?

With PSPI in it's current state, it could choose to delist to save costs - which could be one of the outcomes of it's stratergic review - so I am not too sure that there are many companies where the unknowns are as great. Delisting also minimises embarassment for the professional advisors as well as management.

[kenny] 02/5/2012 17:21

Equity in the UK assets may be negative and wipe out most of the value in non-UK assets. We do not know ECG's financial position but if they are struggling to pay the contracted rent, it is clear that any combination solves both parties problems but also takes on the others problems. Part of the attraction of PSPI was that they owned assets and were insulated from any trading problems at the operator - it is not working out that way! Hiding non-payment of rent in the final note in the accounts, seems to me, a sign of desperation.

The US post offices could be worth a lot less because if you google it, you will find the US government has adopted a policy of closing hundreds of them -which is only somewhat hinted at by management; instead of presenting the full picture.

I wish you luck because even if remaining value is a multiple of two or three times the current share price, I would not invest because there is too high a risk of a 100% wipe out in a recapitalisation - or either of ECG or PSPI going into liquidation because there is no one willing to recapitalise them. Months spent discussing a combination is not a healthy sign that a solution is possible.

[kimboy2] 02/5/2012 16:55

Well firstly we don't know who or how much the shares they took for the debt are.

Secondly didn't Elliot take a load of shaes instead of the dividend.

And Thirdly perhaps the point of remaining in is that the equity in the non UK assets are perhaps worth 2 or 3 times the market cap.

I realise I am flogging a dead horse as far as this board is concerned. I also realise the situation is not without risk.

[kenny] 02/5/2012 16:41

Kimboy2, with due respect, I think you are flogging a dead horse.

The report from Edison makes no mention of non-payment of rent per the final note in the accounts. There may be some residual value here but most of it will go to whoever is brave enough to put up some money as working capital - in addition to a bank advancing a new loan. The obvious party is Elliott, but unless they have a change of mind, it is apparent they are not willing to invest more here and have, in effect, written off their investment.

Unlikely to see any dividends for years, if ever, so what is the point of remaining invested in PSPI hoping for a miracle?

[kimboy2] 02/5/2012 16:28

Note out from Eddison.

At this point, however, the share price attributes zero value to PSPI's UK portfolio, a highly pessimistic assessment of the prospects

It also suggests that not all the EC properties will be in the deal and that only enough to get the financing will actually be merged.

Seems sensible to me and would ring fence the non UK assets.

[envirovision] 01/5/2012 16:43

that said, they have known enough not to touch this stinky mess with their own money so they aren't complete idiots give them that

[envirovision] 01/5/2012 16:36

The post office assets, I assume the post service has seen a similar decline as in the UK making many sites properties unsaleable as a going concern and many near worthless due to location.....just a guess. Some of the EU assets have already swallowed notable re-investment/maintenance costs but don't see upward revision infact the reverse. How overstated is the non UK assets one wonders could be significant, not an expert just using common sense

[kimboy2] 01/5/2012 00:20

Why ?

The non UK assets are valued at £88m after today's devaluation and borrowings at £44m according to note 31.

That is equity of about 2.5X the present market cap.

The non UK seem to have taken the major hit on valuations today. Presumably because they have brought them down to levels where people have shown interest, if they could raise the finance.

The debts are non recourse so thses assets are to some extent ring fenced from the UK assets.

Note 31 shows the UK assets as £201m with £101m debt. It is impossible to know what a merger would like without seeing the other sides accounts.

However the fall back position should be a DJAN type solution of finding another tennant. As long as the bank agrees that may leave £30-40m of equity.

IMV the non UK assets should prove a backstop with whatever they can engineer from the UK providing upside.

FWIW I think that there is money to be made at these levels, but then again I haven't read this one very well.

[scburbs] 30/4/2012 20:15

Yield of the properties is finally starting to look sensible (similar to Quercus). However, EC seems to be struggling badly and I expect the rent is above market meaning the yield is overstating valuation as the rent is too high. This new valuation is probably the one to apply a Daejan type adjustment to in order to get a realistic value.

Unfortunately, PSPI seems to have no future as a property company so the value (other than the vacant possession value) as an investment property becomes less important.

Not sure why it plummeted today, surely no-one expected the dividend to be held?

PSPI remains impossible to value without the EC operating information.

[hosede] 30/4/2012 15:27

Where is Guy Hands when you need him :-)

[kenny] 30/4/2012 14:15

...and hidden away in the last note to the accounts is confirmation of what I have said many times before, namely that ECG must have it's own cash flow problems:

"In April 2012, a subsidiary of the Group entered into a subordination agreement in respect of certain trade receivables in exchange for a pledge of shares in the third party owing the money to the Group."

[davidosh] 30/4/2012 11:07

Any views on the restatement of the 2010 accounts ?

[kenny] 30/4/2012 10:52

Indeed, it is interesting that the UK properties are valued at a 7.8% yield despite:

1. Their own valuers stating that valuation yields should be between 6% and 13.5%. The average of that is 9.75% but the company has deduced that their properties are so special that they should be valued at an average of 7.8%, which presumably allows for the rising vacancy rates!

2. It is possible to buy a care home on a 12% or more yield so why is any bank looking at refinancing going to accept the company's own valuations against a) the prices being acheived in the market and b) their own valuers much higher average.

Management seem to be letting out the bad news in small doses, the only advantage of which is that private investors have time to exit. Leave this company to the professional investors who will take most of any remaining value as a cost of putting up fresh money.

[kimboy2] 30/4/2012 10:13

It is interesting that the main devaluation of assets has been in the non UK, particularly US & Switzerland.

UK assets will have declined from £191m to £184m. Net equity is alleged to be £100m.

[envirovision] 30/4/2012 09:55

Got to concede it does give a glimpse of the mess which lays beneath ECG.

Afraid I have to admit this is starting to look terminal.

[kenny] 30/4/2012 08:45

A rather important piece of information that is buried in the accounts:

"Occupancy in the rest of the UK portfolio was between 86% and 88% throughout 2011, although it had dropped to 83% by late March 2012. Three homes, representing approximately 4% of the total registered beds in the UK portfolio, are empty at this time which are either currently being refurbished or are under review by ECG, again challenging operator returns."

[skinny] 30/4/2012 07:38

-- The Company has entered into negotiations with the European Care Group ("ECG"), the Company's sole UK tenant, with a view to combining a majority of PSPI's UK assets with ECG's assets and businesses and the refinancing of the combined group's assets and businesses. Further announcements will be made in due course

-- In view of the matters noted above, the Board of Directors does not recommend the declaration of a final dividend

Patrick Hall, Chairman of PSPI, commented,

"The economic climate in the Company's various markets remains challenging. As indicated in the Company's announcement on 2 April 2012, the outcome of the discussions with ECG and/or refinancing of the Group's debt maturing in September 2012 may have a material effect on the future value of the Group's assets and the level of its operational profitability."