News
Date: 2009-04-28
Market Update Briefing to Analysts Transcript
Rod Fehring:
Thank you very much and thank you for those who have called in. I’m sitting here in Sydney and with me is Paul Walsh who is the CFO for Lend Lease Prime Life. We just about 10 or 15 minutes ago listed on the ASX a press release and a market update presentation, which will be available to you. We will email it to you tomorrow or later this evening but it is available to you to pull up on your screen if you just go in on the LLP ASX sticker but in the meantime I’ll just go through the presentation. If you’ve got access to it you are welcome to and then this will take around about 15 to 20 minutes of us speaking. After which we will open up to questions and answers and then close off. Because we have only issued the document relatively recently, obviously available in subsequent, at a subsequent time tomorrow or whenever you want to call us for any follow up Q and A that you may wish to ask directly.
I will begin by firstly welcoming you all. This is the first time we have done a market update. The rationale for doing this update is to signal some progress in improving our cash flow and streamlining the operating business. Our operations of the business, after an initial review process. Lend Lease took control of the management rights from, Babcock and Brown Communities on the 28 November last year. We issued first half trading results on the 27 February this year which incurred significant right downs on the balance sheet and at the time questions were asked about distribution policy and the like and we felt it appropriate to update the market immediately following the completion of our initial review after the first quarter, which is what we are doing here today.
The first thing to say in terms of an overview of what we will talk about, the key actions that we have undertaken in the last four months to streamline the business is to consolidate into two lines of business, the retirement living and the aged care business. We’ve conducted a strategic review of the aged care business and identified significant upside opportunities in the cash flow in that particular business and as a result we feel it is appropriate to pursue those value creation opportunities within the aged care business over the next 18 months, thereabouts. We are also embarking on an overhead reduction programme to refine if you like and move on to a single operating platform. The opportunity or our access sales are proceeding on target. We’ve identified up to $45 million in non-core asset sales of which we have contracted 15 and we would be seeking to move steadily through the balance of those identified asset sales over the next 12 to 14 months from here.
Restructuring our commercial arrangements within a number of relationships we have within the business. We have also identified significant opportunities to improve cash flow within the business and we have also, further, through procurement initiatives within the business identified an opportunity to be able to deliver synergy value of $3 to $5 million over the FY09 and FY10 financial year. And furthermore the aged care business has significant opportunities to increase it per bed.
We have initiated valuations to assess the carrying values of assets. We expect the results of that valuation process in June 2009 so and we have also been the beneficiary of a significant improvement in sales momentum in the retirement living business, which is contributing to an improved overall cash flow. These actions build head room for us against our banking covenants and we maintain an ongoing relationship with our banks in a very positive relationship from that point of view. We are also signalling a reduction, further reduction in our bank debt gearing levels where we are targeting; we will be seeking to move below our preferred target of shifting the gearing of bank debt under 30%. That is excluding Lend Lease’s convertible notes.
And finally we will be, in relation to distributions policy there will be no distribution paid for the second half of financial year 2009. The primary rationale for that is to conserve cash within the business and we will be addressing distribution policy more broadly on the announcement of our half year results, sorry full year results, FY09.
Just moving through the presentation itself. We have streamlined the business from the point of view of the retirement living and aged care business, the reviews that we have undertaken have identified a significant shift in the market and we expect there to continue to be a shift in the market driven both by regulation at federal government level as well as changes in the needs and aspirations, if you like, of an ageing population. As a result of that we expect there to be a greater intertwining of lifestyle services and products as well as health allied services and products which flows through to the need for us to develop, if you like, a continuum of care strategy where we intertwine those two business streams to create value that otherwise would not be realised.
In order to do that we have moved to a shared services arrangement of the corporate structure and dedicated our retirement living and aged care functions into regional structures to enable a more decentralised business to improve our capture of local market trends and also to improve the depth and quality of our management teams operationally.
We also announced by earlier release today the appointment of two new directors to Lend Lease Prime Life, Mr Ian Crow and Mr Gary Symons. They replace the prior independent directors Professor Judith Sloan and Graeme Martin. It is, the rationale for the appointment of new independent directors is to strengthen our financial and corporate investment management capabilities within the board. Andrew Love will become Chairman of Lend Lease Prime Life replacing Professor Judith Sloan who was previously the Chairman of the organisation. The strength of the two individuals who have significant backgrounds in property, investment management and particularly in the corporate world with MLC is important from the point of view of plotting a course through what all of us would regard as uncertain times.
Moving on to strategy; our strategy is a process that has three key things to it, which revolve around business simplification process, to eliminate and reduce the number of operating entities within the group and move to a single operating platform. The intention of that is to start to explore ways that we can integrate the health service line with the retirement living line and get the benefit of both of those business functions in meeting market needs. We have also identified a significant amount of process improvements and synergy, which we believe that with focussed attention, can drive significant additional cash flow into the business, or out of the business, over the next 12 to 18 months.
The value creation theme that we have identified as a key driver of new value creation, particularly top line growth will largely focus around restructuring commercial operations that we currently have and improving the quality of our asset management strategies across the portfolio. And then finally the service based culture theme, important from the point of view of being able to develop a partner of choice and an employer of choice strategy given that we employ currently in excess of 2,000 people, the vast bulk of which are relatively low paid and casual employees providing care in aged care facilities. We need to ensure that their motivation and commitment in doing what they do is constantly upper most in our minds.
In some cases, in moving through the simplification process this may involve a deployment of capital to unlock cash flows. Our strategic priority going forward and that we have addressed during the last five months is to identify ways to strengthen and improve cash flow generation and while capital is to be deployed it must be deployed on an accretive basis to ensure that cash flow is unlocked on terms that will improve the overall operating performance of the business.
Moving next to the positioning of the company. As the largest pure play senior living trust operating in the Australian market our strategic relationship with Lend Lease means that we do not need to develop or maintain a significant future pipeline of development of our development project and as a result we have reduced by nearly 1,000 units, the size of our development pipeline. The rationale for that is that we can liberate that cash flow or that capital, beg my pardon, to either reduce debt or to perform other functions within the business. As a result of that strategic relationship with Lend Lease we are, we see the opportunity to be able to further develop and concentrate our activities as a pure play in the retirement and senior living sector.
There is a diagram that outlines the diversification of the portfolio that we have. That is important for two reasons. One, is it provides a hedge, a natural hedge against movement, cyclical movements in markets. For instance, our Victorian operations are performing quite well whereas by contrast our West Australian markets are not performing as strongly. One counter balances the other. The other point is that it also provides for significant sectoral diversification to enable, not only exposures to our Greenfield new development but also our Brownfield in fill development as well as to maintain a balance between new development and established sites, established projects which all contribute to improving the quality and balance of our cash flow going forward.
Moving on to development. The scope and extent of development within the business, we will selectively recommence development on a limited scale within the business, particularly in the RV space but also to undertake the redevelopment of existing assets in the aged care business, which are operating in a sub standard form. We also, and as a result of that, while that will consume some capital in the near term it will also generate improvements in, not only sales performance because it removes the uncertainty associated with our intentions with the projects where we undertaking development but it also enables us, on an ongoing basis to start to improve the quality of the assets that we are involved in.
From a sales performance point of view our sales have recovered, with February relatively, speaking, February being a poor month. but since then March and April are showing solid sales, particularly in the resales side of activity. Primary sales are showing also improvement but from a low base. We believe that with the more sales focus, with more effort focussed on sales that we will be able to maintain that momentum and in addition we have noticed from market feedback that the removal of uncertainties associated with the Babcock & Brown involvement in the business has been a positive to, and contributed to sales.
Moving on then to the asset valuations. We have included a slide in the deck that you will have access to, or you have access to now, that sets out our holdings on a region by region basis or a state by state basis from Victoria, New South Wales, Queensland, WA, SA and New Zealand and sets out typical contract forms and types in those, each of those regions because they do vary from one region to another. As I said, we have commissioned valuations from independent valuers for a third of the Australian portfolio and as required under statute allof the New Zealand portfolio. While it is fair to say that there continues to be uncertainty around discount rates in particular we have made some provision for uncertainty that the valuation process that we have embarked on will provide confirmation of that which we expect to have available as I mentioned earlier, in June. At a portfolio level we have adopted discount rates of 12 5% across the portfolio and we have also adopted growth rates at just under 4% for the portfolio as well which we indicated and announced I think at the February half year results and we are maintaining those positions until such time as we have completed the valuation process.
It is important to understand that the complexity in the business is significant where we have around about 180 different types of contract in the portfolio from a retirement living point of view so the extrapolation of valuations for a third of the portfolio is a complex task and we will be undertaking that process once the initial valuations are available to us.
Moving then to the aged care business. We have identified opportunities as I mentioned earlier for the aged care business to improve its cash flow. It is performing solidly at the moment. We do not expect there to be, and under current settings, any impairment in the aged care business. It is fair to say that we have, the integration of the conform business in New South Wales has been proving more complex than we had anticipated. However we also see significant value upside in that business as the proprietary systems that Lend Lease Prime Life has developed are rolled out progressively in that business and begin to have effect. Particularly in the form of the track system for manpower management and the predictive rostering systems as well which enable optimum staffing levels to be maintained within the portfolio on an ongoing basis.
The opportunity to be able to capture that value is real and material over the next 12 to 18 months and we would be expecting that to translate into an improvement in our operating performance within the business of up to 30% of current settings. That material, that flows through into the material improvement in the value of the business too. The strategic review that we undertook of the aged care business concluded. As I mentioned the upside in value opportunity and that is largely available to us from a process of capturing better improvements in operating systems, rationalising sub optimal asset configurations which, of which there are a number and we will also, as part of the process of continuing to capture and add that value, explore other ownership structures that enable us to be able to continue to provide that continuum of care opportunity which we see as critically important in being able to add value to the retirement living, the overall retirement living experience, particularly the merger, if you like, of the lifestyle and health services products of which there is a real opportunity we think to create a new paradigm for the retirement living sector.
The next slide that we have included is simply a statement of our accreditation performance within the aged care business, nine accreditations have been completed to date, year to date, that is calendar year to date. All of which have achieved a 44 out of 44 rating which is required in order to maintain accreditation of those facilities. We have another 12 accreditations to go during calendar year 2009 and into 2010 so it is a fairly heavy program that the aged care team are embarking upon. We have included a asset sales schedule which indicates how much of the potential total of $55 million of asset sales that we have identified and how we are progressing it against that. About $15 million is already contracted. Another $5.6 million is under offer, where negotiations are continuing and we have another 22 just under 23 million of assets that have been identified and are now on the market. We have eliminated about $1 million worth of liabilities associated with options and other types of transactions that had been pre-existing in the business and we have eliminated those and we have also identified about $11 million worth of property that is available for alternative uses where a higher and better use is involved but which may require a different development approach. In those circumstances we will be exploring those opportunities with Lend Lease with a view to realising that value over the next one to two years.
So from that we’d, I’d simply conclude that the asset disposal programme is on track. The recapitalisation of Lend Lease provided for, or required, that the proceeds from non core asset sales is directed towards the repayment of Lend Lease convertible notes. In that way we effectively continue to reduce the overall operating in costs on the business from a cash flow point of view. You will recall that the Lend Lease convertible notes attract a coupon rate of 9.5%.
Moving on to debt and borrowings which we have included a slide in there. Our current, our bankers are ANZ, NAB and the Commonwealth Bank. We have two covenants that we operate by, an interest rate, an interest covenant and a gearing ratio. We have a refinancing programme that is dated into the future, we have $350 million worth of current borrowing facilities to be refinanced on, in December 2010 and a remanning $175 million in December 2012. We are relatively unhedged in terms of interest. Paul Walsh announced during the half year results the unwinding of a number of hedged, of policies in the instruments that were in the portfolio and as we speak we are, we are currently floating our, in terms of our debt, we are currently floating about 70% of that debt is floating interest rates with about 30% of it hedged. As I mentioned earlier we are targeting a continuation of a reduction in our gearing ratio. By mid year we expect to be under 30% gearing, that is of bank debt. The only caveat on that is in relation to uncertainties around valuations but as I mentioned earlier that is a piece of work that is in process.
And finally, the over arching point from the market update is that our operating cash, net operating cash flow for the half year to the 30 June 2009 will be positive. That is after servicing bank debt and that is a significant improvement from where we were in the first half but contributors to that improvement are largely driven around restructuring opportunities to deliver a significant potential improvement of our cash flow from renegotiating some commercial arrangements that we currently have affecting specific assets, some procurement improvements which we are identifying, around $3 million per annum which we should be able to procure from the existing supply chain that we have within the business which is a significant supply chain in terms of number, about 33,000 suppliers in our business with significant opportunities to improve procurement through procurement management strategies.
Organisational efficiencies, which we will capture over the next two years, are part and parcel of the streamlining of the business and capital management initiatives, which are largely designed to accelerate the reduction of bank debt, provided that we are in so doing investing in accretive activities on an ongoing basis.
So just to reiterate our primary strategic focus going forward is to continue to improve our operating cash flow and we’ve got the first signs of that now starting to appear which is the purpose of this update to signal it.
As I mentioned before, just in conclusion the priorities going forward, no distributions for FY2, sorry the second half of FY09 and from that point of view we will be focusing on a continuation of the quarterly reduction of debt, active improvement of our cash flows, completion of the integration processes which have largely not yet yielded significant synergy benefits but we believe they will, provided that we are focussed on them. We need to continue to maximise the performance of the aged care business and simplify our operating platform going forward. We want to move to a single operating platform. Part of that will be unifying our branding under the Lend Lease Prime Life brand positioning and ongoing value creation opportunities are now in hand, in terms of what they are, how they are resourced and what we think the potential value of them could be but having said all of that there will be a continuation if you like of a strategic review process which will continue to focus on ensuring that we are using the right corporate structure to ensure that the business can conduct itself to the best, in the best manner possible.
In conclusion, we, from my perspective and Paul will add to this in the Q & A, I suspect. On completion of the review process we feel as though we have got a stronger handle on the business now, in understanding where value lives, how to achieve it and more importantly the strategic direction that we believe that can be delivered as a result of pursuing that simplification, value creation and service based culture improvement strategy. As I mentioned before our near term priority is to build strength into the balance sheet, develop confidence and engagement in our people and create value in an operating platform with an emphasis, strong emphasis on improving our operating cash flow.
So that concludes the presentation component of it. As I mentioned before, this is now available on the, the Lend Lease Prime Life website and also at the ASX, lodged with the ASX. There is an attending ASX statement which goes with that as well, with media contacts to be directed through John Frey of Cosway on 0411 361 361 or myself otherwise. So at that point, I would just open it up to questions, Mary and we will take it from there.
Paul Checchin from Macquarie:
It’s Paul Checchin from Macquarie, but just a quick question in relation to your covenants, etc, you guys obtained those wavers in relation to your covenants up until June 2009, is it your expectation that you will be in compliance with your covenants beyond that, so looking to fiscal year 10?
Paul Walsh:
Yeah Paul it’s Paul Walsh, subject to revaluations, or valuations we’re about to put in place, not being majorly negative.
Paul Pekin from Macquarie:
And what about from an interest cover perspective because if you look at your interest cover last half your operating EBITDA was around $9 odd million and your interest expense was around $23, $24 odd million, so you’re well short of kind of covering interest on that P & L reported basis. Is that the basis on which your interest cover covenant is determined and then are you …
Paul Walsh:
For that period there was some carve outs. For that half period so it’s a little hard to calculate in, without all the data but there was some carve out that enabled us to get through.
Paul Checchin:
And looking to kind of this half then are you expecting that your operating EBIDA will exceed your reported interest expense?
Paul Walsh:
Yeah.
Paul Checchin:
Okay, thanks guys.
Rob Stanton, JP Morgan:
Sorry, just to follow up on that, what are those covenants that are in place?
Paul Walsh:
We’re not disclosing them.
Rod Fehring:
We’ll tell you what they are Rob but not the actual metric, we’re just precluded because of the relationship we have with the banks, that’s all.
Rob Stanton:
Right when do you plan to tell us?
Paul Walsh:
When the confidentiality obligations are removed from our bank facilities. Which I doubt that that will happen.
Rob Stanton:
Right that’s okay, what’s outstanding on the Lend Lease convertible notes, can you just remind me what the total is?
Paul Walsh:
158.
Rob Stanton:
158. Okay, thank you.
Jo Little, ABN AMRO:
Hi guys, just a quick question on these asset sales, on page two you’ve got approximately $45 mill in non core asset sales and then on page 14 you go to about 55 and the proceeds from which will be used to pay down the convertible notes and yet you’re trying to get that gearing to below 30% excluding the convertible notes. Can you just clarify that process for me?
Rod Fehring:
The 55 includes those higher and best use assets so that might happen but it will probably happen over a longer period of time Jo so the $45 million is what we’re focussed on from the point of view of the near term asset sales and that capital being recycled if you like through either paying down convertible notes or bank debt.
Jo Little:
Right okay.
Paul Walsh:
Asset sales need to be repaid against the convertible notes and then there just needs to be under the agreements, and then subject to what is sold and where gearing is there might be a little interplay between how much goes against bank debt and how much goes against convertible notes.
Jo Little:
Okay, great. And just the sales momentum, that’s great but what about the price growth you’re seeing to date in the second half, can you make a comment on that?
Rod Fehring:
It depends on which market you’re talking about Jo. We’re seeing good price growth in South Australia and in a number of locations in Victoria. We’re seeing surprisingly some price growth in Perth but not in all locations, we’re seeing limited price growth in Queensland, particularly in the Sunshine Coast focus which we have now under the, under the PTM, management relationship but generally speaking the price growth across the portfolio is a little less than we would like it to be. New South Wales is patchy, I think, particularly regional New South Wales and as I mentioned, no I didn’t mention, New Zealand there is not much in the way of price growth there at all.
Jo Little:
Okay and just lastly, a trivial question I guess but just in terms of the Board of Directors, can you just clarify where the real retirement experience is coming from there?
Rod Fehring:
The retirement experience, in terms of Ian Crow, Ian was a past Director of the Parklands Group in WA, he also was a Director of MLC which was a significant owner of retirement villages, and prior to any involvement he had with Lend Lease so goes back, right back into the late 80’s. In addition to that, we have also had Andrew who has had, for a long time been involved in the retirement sector, one way or another and also we are drawing on the expertise, if you like, of the management team in the group and also the management team that exists in Lend Lease Prime Life. The other thing though that we felt within the Board was the need to be able to deal with a lot of the corporate and financial management issues that we need to work our way through as we start to consider the structure of the business, particularly the corporate structure of the business, given that we’re a staple entity but we’ve got a trust that actually has one particular asset which is the loan that it provides for the operating company and we’re, we’re not sure that its the right structure but that’s a piece of work that we need to work through.
Jo Little:
Okay and lastly, just on the valuations. I know it’s hard to say in advance of these things being sorted out but have recent transactions of the likes of Becton, etc. made you more comfortable with your current valuations I guess?
Rod Fehring:
Yeah I think so. I think the difficulty when we did this back in February Jo was there was just no transactions, anywhere and so the people that we were talking to from an valuation point of view had no reference point whereas now that we’ve had the Somerset transaction and also the Becton transaction which does provide a degree of comfort. Not necessarily so much to us, it’s more so to valuers who now at least have something to reference.
Jo Little:
Okay, thanks very much.
Rod Fehring:
Thank you.
Rob Stanton, JB Morgan:
Hi Rod, just wanted to come back to this covenant issue, just find it a bit surprising, we cover I don’t know 25, 26 odd other property groups and I can’t think of one that won’t disclose their covenants in place. Now ANZ, NAB and Commonwealth are lenders to all these other guys, why are you different?
Rod Fehring:
I don’t know Rob, is the answer. The answer is we are though. We’ve, it’s not because of reluctance it’s because of the structure of the agreements that we have and the funding facilities that we’ve got. You just have to take us on what we’re saying is that we’re bound by a confidentiality obligation and there it is.
Rob Stanton:
I’m not questioning whether that’s the case but surely I would have thought it would be in the bank’s interest that equity holders understand what they’re getting themselves into otherwise how are they going to price the thing.
Rod Fehring:
Yeah it’s a fair point, it’s, all I can say is it’s something that we will discuss with the banks but it’s not really our prerogative to be able to offer on that one but it’s a fair point that you raise, if the banks have adopted other practices with other borrowers then it’s reasonable that we have an explanation from them as to why they treat us differently and all I can say is though they do.
Rob Stanton:
Okay, all right, thanks.
Rod Fehring:
Thank you.
If there are no further questions, what I suggest is that we call it an evening, if you have a chance to be able to review the document that we just spoke to tonight Paul or I would be happy to field questions from you tomorrow if we haven’t covered you off satisfactorily tonight. Other than that I wish you a good evening.