Public Services Properties Share Discussion Threads

[grahamburn] 30/9/2011 13:56

goliard. Let me put it another way. If you were a tenant (of any commercial building, or even a residential building) and your business efficiency/life was temporarily disrupted by extensive buildings works on the property, you would expect some form of compensation: either reduced rent or capitalisation of rent. So far as the accounts and statement accompanying them show, that is all PSPI are giving to ECH. I repeat, the deal only applies to the properties subject to building works, and not the entire portfolio. So I do think you are making a leap of logic on this particular point. My final comment in my last post did, however, acknowledge that there are potentially other problems within both PSPI and ECH: they simply don't involve this particular issue. That's all. IMHO.

[scburbs] 30/9/2011 12:18

Strategic review is interesting. If they have enough capital, the UK assets would make a very tempting purchase for .......... European Care Group! ECG's business will probably struggle to sustain the 5% p.a. rental increases, so why not buy the assets and put a stop to it. The only real reason not to would be not being able to afford them.

[scburbs] 30/9/2011 12:04

Kimboy2,

I wouldn't rely on those old EC forecasts. A 3% fall in occupancy will probably have put paid to that. A 3% fall might not sound much, but that assumption would be wrong. Unfortunately there is no suggestion that EC is outperforming the sector due to a high percentage of private sector patients. A new CEO and FD at the same time isn't great either.

"Local government authorities are referring residents later than previously and as a result, core occupancy within EC has declined by approximately 3% over the last financial year, in line with trends across the sector. General occupancies across the mature properties in the EC group are approximately 85%."

[goliard] 30/9/2011 11:57

graham, sorry, I don't agree and stand by what I have said. SteMis's post is correct re the way the scheme works and I take no issue with it. However, it is absolutely clear that they are allowing the tenant not to pay rent and rolling it up as an 'investment' instead. Where I disagree with Stemis is that he believes this is good business. It is only good business if you can be sure that the tenant will be able to pay the increased rent for the entire term of the lease. It is of course a matter of opinion as to whether or not they will, but, given that they are preferring to avoid rental now in order to pay a higher amount later, this implies to me that they are in trouble at these particular sites. This is exactly the problem that Southern Cross had other than the accounting trick was slightly different in that they sold freeholds at high prices in order to pay inflated rents. Of course the other point is that they probably had no option on either side other than to agree this as otherwise they would be reporting defaults. Its a 'lose lose' situation.

Kimboy, all correct, but again look at Southern Cross. Huge EBITDA, but cashflow got stuffed.

All just our individual opinions and if you think the future of funding of care homes looks bright then you should definitely be investing here. I dont'.

[kimboy2] 30/9/2011 10:59

Well in the 2010 PSPI AR European Care said that in 2011 their turnover would be about £140m and EBITDAR would be about £40m.

We know that PSPI is just about their only landlord and that the majority of the properties are leased from EC's ultimate owner Esquire.

We know that PSPI charged about £12.5m.

That gives EBITDA of £27m.

EC have about £10m debt so the interest charge is about £500k.

Depreciation is £2.7m pa.

That would suggest to me that EC isn't under a great deal of pressure and that Esquire is unlikely to throw the towel in on them.

[grahamburn] 30/9/2011 10:32

goliard. Think you have jumped to a partially incorrect conclusion regarding the capitalisation of rent in your post 738 which SteMis effectively answers in 746. But just to re-emphasise: the capitalisation of rent relates solely to homes where there has been or will be disruption due to the refurbishment or expansion works. It does not relate to other homes, so far as can be ascertained from the paragraph from the statement copied into SteMis's post. In short, the process is entirely proper and logical and shows good business sense on the part of PSPI. Your conclusion that the tenant is under financial pressure does not follow from this - though, of course, ECH may indeed be having to review its operations due to the change in climate surrounding care home occupancy and rising costs etc.

[ptolemy] 30/9/2011 09:57

Go back five years and you'll see they were trading at a big discount even then, so I don't think the cloud of Southern Cross can account for all the reason. I tend to the view that having a single tenant for the bulk of the business is a prime reason (plus PSPI's failure to explain why they're holding post office assets in the USA).

I consider PSPI management to be steady hands, but the big unknown is just how sound is European Care? Less than before is the probably correct.

[stemis] 30/9/2011 09:28

The dividend cost for 7.5p (the forecast dividend for 2011) is £7.7 million. The company made a profit in H1 (excluding fair value adjustments on investment properties and also exchange/swap gains netted off interest) of £4.7 million. So dividend is more than covered by earnings. Cashflow from operation in H1 was £3.6 million so dividend is slightly uncovered on cashflow, but £0.5 million shortfall compares to NAV of £121.3 million. Hardly significant.

LTV is a conservative 50%

Valuation of properties was down £3.6 million but they say

Fair value adjustments on investment properties showed a reduction of £3.6 million at 30 June 2011, representing a decline of 1.3% for the investment property portfolio since 31 December 2010. The majority of the decline was in respect of the Company's Swiss asset where the operator had experienced a significant drop in occupancy towards the end of 2010. We are pleased to note that occupancy has largely recovered but the independent valuer has marked down the asset at 30 June 2011.

Yes, the company is spending money on expanding existing money and is capitalising some rent in certain circumstances as set out below

On completion of each project, rent payable under the relevant leases will increase by 8% of the gross capital expenditure. In the meantime, the Company has agreed to capitalise rent on properties where there is a material disruption to occupancy, and hence, operational cash flow for the Company's tenant, prior to commencement of the new construction and refurbishment phase, through to the post completion build up in occupancy.

Seems fair enough to me and good business practice. Borrow money at, what looks like, 4.5% and get an 8% + RPI return.

The company clearly recognises the negative publicity the whole sector now has and the concerns about European Care. That's why its trading at a 45% discount to NAV, a 56% discount to adjusted NAV and a 11.5% yield. It's also flagging that its hard to raise funds for future expansion. Hence the strategic review. Maybe that'll involve the sale of some of its assets e.g US/German/Swiss assets. Frankly if they could get close to book value and return the money to shareholders, it would be accreditive to shareholder value. Or maybe they'll look for a sale of the company. A 45% bid premium would still be 20% discount to NAV.

Personally I'm happy to keep picking up the dividends.

[wjccghcc] 30/9/2011 08:54

Kimboy, it didn't in 2010 and looks unlikely to in 2011. Remember the total dividends are now over 7.5mm because of the increased number of shares.

[osirisra] 30/9/2011 08:48

nurdin, I think the posts this morning might hold the answer. There seem to be some good folowers of PSPI on this BB who have pointed out the fragility to the business. There are issues that can be addressed to improve things and the management seem to have acknowleged the fact by holding a review. The spectre of Southern cross is still hanging over PSPI but the management here IMO are of a superior quality.
The NAV situation will sort itself out if/when faith returns to the sector and PSPI. Just a waiting game. If they do gets things back on track and the dividend continues to be held and is shown to be sustainable then PSPI will start to look very cheap. Things don't happen overnight but these results are, to me atleast, encouraging.
Osi'.
P.S. Thanks for the informative posts this morning guys.

[nurdin] 30/9/2011 08:17

The question is,why are they trading at such a huge discount to NAV? Is the calculation of NAV in question?

[kimboy2] 30/9/2011 08:11

The dividend in the accounts is greater than the operating cash flow by about £1m. However that is the final dividend. Overall I think that cash flow, pre capex, will pay for the dividends.

Next year they will have some increased rentals, and lower interest, as well.

Hoefully they are going to flog the Swiss and USA outposts and start some buy backs.

[goliard] 30/9/2011 08:01

Yes indeed.

[joe say] 30/9/2011 07:59

and hence the scrip alternative

[goliard] 30/9/2011 07:58

Oh yes and the Fact that they cannot afford to pay the dividend but are paying it from cash reserves!! That is no better than a ponzi scheme, ie ask investors for money then give them some back as a high dividend. That's exactly what Maddoff did!

[goliard] 30/9/2011 07:54

Yes, but you need to read a bit more. Clearly several homes under pressure and they are capitalising rental payments (ie waiving them until later) in order to allow these homes to keep functioning. Also, they are spending money on upgrading homes against the hope of future income. Normally I would expect the tenant to do this. Also, the dividend policy looks like it is going to be reviewed, so you may see the end of the progressive dividend policy.

It is clear to me that it is only because of PSPI's support for it's tenant that we haven't seen defaults. That is what is worrying. They can't keep this up for too long and simply increasing rents to pay for more refurbishment is not a long term solution. It was the higher rent burden that led to Southern Cross going bust, but SC didn't have the benefit of this type of cozy relationship with it's landlord.

On the surface the results are very good and if the two companies were independent then this would be a great result. It would not surprise me to see a rise today as people focus on the current results. However, I have real concerns about the future here and I am not sure that the board can do much about it. The only way I can see this surviving long term is for the operating business to merge with the property business, but shareholders will probably hate that as they isn't want a care home business and didn't invest in one, they wanted a pure property business.

Alternatively PSPI will sell it's property interests off and return money to shareholders. I know PHP is setting up a new fund, maybe they will be interested, but at what price?

[wjccghcc] 30/9/2011 07:51

They're still not generating enough cash to pay the dividend though - it's being paid by the remains of the fundraising. It seems to me that's also an (unmentioned) reason why they're doing the strategic review - the dividend is likely to be ultimately unsustainable.

[osirisra] 30/9/2011 07:42

-- Adjusted earnings before tax of GBP5.0 million or 4.9p per share (30 June 2010 - GBP3.5 million or 4.2p per share).

-- Cash rental income increase by 2.2% to GBP8.5 million (30 June 2010 - GBP8.4 million).

-- An interim dividend of 2.5p per share to be paid on 29 November 2011 (record date 14 October 2011) (2010 - 2.5p per share). The Board of Directors has resolved to introduce a scrip dividend alternative starting with this interim dividend, subject to shareholder approval.

-- Investment properties valued at GBP276.9 million (31 December 2010 - GBP272.2 million).

-- Net asset value per share at 118.4p and adjusted net asset value per share(1) at 148.3p at 30 June 2011 (31 December 2010 - 119.9p and 150.5p).

-- The Company repaid GBP8.6 million in debt during the six months ended 30 June 2011 (2010 - GBP2.1 million) and invested GBP3.6 million in capital expenditure (2010 - GBP1.5 million).



Earnings up, Cash from rent up, NAV up, debt down, dividend held. What's not to like (so the dividend could have gone up but it's already 11%. Happy to hold and see what the management come up with to address the share price discount, any thoughts on that one?
Osi'.

[woodcot] 30/9/2011 07:30

On the surface it looks okay, at least no big holes to fall down.

[fenners66] 26/9/2011 15:42

Thanks Joe / Scburbs,
I'm well.
the PDF is certainly an improvement on the online draft version, I'll have another read through.
I see the paragraph referring.
I note and understand the technical "profit" for ECH I guess that also has come about through neccesity and clearly the 2 parties are working together to try and mitigate the damage. On the one hand thats a good thing on the other .....
I guess I will still await results due ...?

[scburbs] 26/9/2011 15:07

Hi Fenners66/Ibrox,

I hope you are well. I completely agree that the lack of disclosure was very poor and it is true that this adjustment had been flattering prior years profits.

The accounting treatment of recognising future rental income is not a good one in my view, but not sure that is PSPI's fault! ECH would have had a broadly matching provision for future rental increases (i.e. they would have been recognising rental expenses in advance, SCHE had a massive £260m provision for future minimum rental increases on its balance sheet at 31 December 2010).

The leases continue to be annual RPI increasing leases capped at 5%. Previously they had a floor on minimum annual increases of 1.5%, but this is now gone. The main driver for the change would have been to allow ECH to release its provision against this as there are no longer any guaranteed minimum rental increases. ECH would have booked a large profit in their accounts, but it wouldn't really have materially increased the value of their business (unless you think RPI will go below 1.5%).

Where the annual increases are uncertain (as RPI could be nil) then the accounting rules no longer require you to accrue for future income/expenses, hence the adjustments on the removal of the minimum increase.

In any event, it is difficult to see how ECH will be able to cope with RPI leases if RPI is going to remain at c.5% for another 2-3 years.

[joe say] 26/9/2011 14:46

Page 10 refers - removal of the inflationary 'guarantee'

[fenners66] 26/9/2011 14:07

Scburbs , hi thanks for your reply, this is Ibrox from the AHT board under another name, so I know you are generally knowledgeable on such accounting matters.
Its been a while since I read the results and interpreted the change, I ought to go back and re-read it But....
I was reticent about the way they hardly referred to such a significant item in the results. That for me was tantamount to sweeping it under the carpet. Clearly its bad news for the results so trying to dodge the issue rather than a fuller disclosure got me irritated and suspicious.
I had to search through the document before I found anything like a real explanation.
I have a fairly small interest here and was not chuffed about having to search high and low for an explanation.

It has impacted in a genuine write off in the accounts, and I wonder what would the funding request have looked like last year without the "profit" already transferred to reserves. (from memeory - without looking was it £14m written off?).

The removal of the guarantee I have to say I have either misinterpreted or read it differently to yourself.
I took it that the automatic increase in rents in line with inflation was to be removed as that was a sign that ECH had effectively negotiated their way out of it. I.e. times are so hard there's no way we can commit to RPI especially with RPI so high. So remove the guarantee and therefore make the "technical " adjustment. Couple that with an increase in debtors (again I'm working from memory here) which suggests that ECH were not paying on time and we have a poor case for them being an A1 tennant. I believe they have burned the cash raised last year and that worries me too.

So technical change it may be - I'm sure it suited them to book the "technical" profit in the first place. But brought about by a decline in the position of ECH?
Cheers

[scburbs] 26/9/2011 11:44

fenners66,

The accounting adjustment was indeed a technical adjustment which stopped future rental income/expenses being recognised by PSPI/European Care in advance.

If RPI falls below 1.5% then it will have an actual impact as the only change was removing the minimum 1.5% uplift (as future rents were guaranteed to increase the accounting was requiring this known future increase to be accounted for now).

This adjustment is, of itself, no reason to keep your powder dry unless you expect an extended period of very low inflation (less than 1.5%) or deflation. With QE set to recommence this seems unlikely, much more likely that monetary policy will be set to partially counteract the fiscal squeeze and gradually deflate away government and personal debt.

Key points for the results are how much is the outwards yield shift to account for increased tenant risk along with any comment on the performance of the European Care Group and the strength of cashflow.

[fenners66] 26/9/2011 10:23

I did not like the "technical " right off in the last set of accounts.
It was partially refered to as an accounting technicality whereas from what I could understand it was instead reflecting a change to the contract for properties and infact took a huge swathe of previously booked profits out of the balance sheet.
For that reason I am holding back my powder until after the next results before comitting to buying any more.