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Edited Transcript of JHC.AX earnings conference call or presentation 26-Aug-19 12:30am GMT

Full Year 2019 Japara Healthcare Ltd Earnings Call

Southbank Sep 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Japara Healthcare Ltd earnings conference call or presentation Monday, August 26, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Sudholz

Japara Healthcare Limited - MD, CEO & Executive Director

* Anthony Rice

Japara Healthcare Limited - CIO

* Christopher Murray Price

Japara Healthcare Limited - CFO & Company Secretary

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Presentation

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Andrew Sudholz, Japara Healthcare Limited - MD, CEO & Executive Director [1]

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Good morning, everyone, and thank you for joining us today for Japara Healthcare's Financial Year 2019 Results. We're going to give you a briefing on the company update. I'm Andrew Sudholz, the CEO and Managing Director of Japara Healthcare. And joining me today is Chris Price, our Chief Financial Officer; and Anthony Rice, our Chief Investment Officer.

Today, I'll start by giving you a brief overview of the key highlights of the last 12 months, following which Chris will provide a more in-depth analysis and explanation of our earnings and our operational results. Then Anthony will spend some time discussing our real estate initiatives before I provide some broader observations on our strategy, the Aged Care industry, and then provide an outlook for our 2020 financial year. Then obviously, we'll open up for -- the line for questions.

So on page 3 of the pack, turning first to the key highlights for the year. Our care and cash flow performance for the year has been strong as we continue our program of investment in both business operations and our development pipeline to underpin our future growth and provide better outcomes for our residents.

Our total revenue was up 7.1% on the prior corresponding period to $399.8 million with the Riviera portfolio contributing for the full 12 months for the first time. Our recurring EBITDA was slightly up on the prior corresponding period with lower nonrecurring guidance. However, our net profit after tax of $16.4 million was down 29.6% on 2018, and this was due to long -- lower nonrecurring income and increased depreciation and interest expense on the newly completed developments in our development program.

We were pleased to maintain our excellent care record, with 10 successful reaccreditations during the year. However, our underlying occupancy was slightly lower, averaging 93% for the year. We invested in the future growth of the business with a net investment of $99 million in land and improving existing and developing new Aged Care facilities. This activity was financed from our strong RAD cash flows, which totaled $44.7 million for the year and also by utilizing debt with our drawn down debt totaling $179 million as at 30th of June, 2019.

Now turning to Page 4 on the pack. I'd like to spend a minute discussing Japara's commitment to quality and to care, which underpins everything we do in our business. Our vision at Japara is to enrich every life that we touch. And we welcome the opportunity we have to share in and enhance the lives of our residents. The number of residents with dementia who live in our homes is increasing, and we are proud to be a leader in dementia-specific care with many of our homes incorporating specialist dementia care units. These units have adapted to the concept of a small home to reflect optimal design and living principles for residents living with dementia.

Our dementia care model promotes independence, personal choices and quality of life with residents encouraging to live life as usual. We are also proud to have maintained our 100% accreditation record in the year. We witnessed an increase in the frequency and the duration of accreditation visits during the year with 10 of Japara's homes reaccredited and a further 57 unannounced assessment contacts.

Turning to Page 5. We saw the efforts being put into our development program becoming more tangible with 3 new greenfield and 2 brownfield developments opening during the year. And our most recent and 50th home in Robina opening last month. And you will have seen photos in the pack of Robina, which is performing very well and have many residents very quickly.

We opened the Highbury in Glen Waverley, which is a new 60-bed home, and a new 60-bed home in Brighton-Le-Sands in Sydney in October as well as a new 99-bed home in Rye, again, in November. These homes provide superior accommodation and lifestyle stages and have attracted new residents in line with or even better than our projections.

We are also well into construction of our next 2 greenfield developments at Mt Waverley in Melbourne, which will provide an additional 105 places, and Newport in Melbourne, which will provide an additional 60 net new places. We also now have planning permits for a 102-bed home in Belrose in Sydney and a 90-bed home in Lysterfield in Melbourne. We have completed extensions to our Kingston Gardens and Mirridong homes, adding a further 84 places to our portfolio, and a further 6 homes were refurbished during 2019 with a total of 33 homes now qualifying as significantly refurbished and providing enhanced lifestyles for [open] spaces for our residents. We have a dedicated workforce of over 5,600 staff, providing care to around 4,000 residents and have been pleased that staff turnover has remained low at 20.3% for the year.

We enhanced the governance of the company in July this year with the appointment of Professor Leanne Rowe to the board, who brings extensive clinical experience. We have also made several additional senior executive appointments during the year to improve our consumer engagement and the management of our real estate portfolio.

I'll now hand over to Chris to take you through our financial and operational results.

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Christopher Murray Price, Japara Healthcare Limited - CFO & Company Secretary [2]

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Thanks, Andrew. On Slide 6, we've set out EBITDA bridge from fiscal 2018 to fiscal 2019, which saw recurring earnings increase slightly, up $1.2 million on PCP to $48.6 million, although total EBITDA fell $1.1 million due to lower net nonrecurring items in fiscal '19.

The temporary government subsidy boost announced on 20th of March 2019, and which ceased on 30th of June, provided an additional revenue of $7.9 million. The increased contribution from the Riviera Health acquisition reflects the full year's trading versus 3 months in the prior year.

Investments in significant refurbishment are providing stronger returns, and we are generating growing earnings from greenfield developments. Anthony will discuss these homes with further information provided on Slide 15.

Return of ACFI indexation of 1.2% provided a $2.7 million uplift, although this was insufficient to offset inflationary increases on wage and nonwage costs. Wage rate growth primarily relates to enterprise bargaining agreement increases. Nonwage costs increased due to a number of factors, including increased marketing activity support occupancy in greenfield openings, higher utility and therapy expenses, and costs associated with preparing for the new quality standards, which came into effect on 1 July.

We have also outlined the impact of the lower average occupancy rate equating to $2.1 million. Occupancy fell [slightly] following the announcement of the Royal Commission and has since recovered gradually. The absolute number of occupied beds has increased steadily since December 2018 as what we've seen in this latest slide. The direct cost of the Royal Commission was $1.8 million. In the above bridge, they are included in the net nonrecurring items.

Turning now to Slide 7. Fiscal 2019, NPAT and cash flows reflect [the power] of significant investment in developments and technology. This supports future growth and provides better outcomes for residents. It is accompanied by higher depreciation and interest costs as developments open.

Capital invested during the year in expanding and enhancing the portfolio related to land, greenfield and brownfield developments and refurbishing existing homes and amounted to $99.4 million, and a further $17.1 million was invested in IT infrastructure and systems.

We were pleased to secure a new 5-year $345 million syndicated loan facility with Japara's relationship banks, ANZ, CBA and NAB in December. The facility will ensure adequate growth funding and debt headroom over the longer term.

Core net debt remains modest at 0.9x EBITDA, and available liquidity is at $166 million. Ready inflows from our recently completed greenfield and brownfield developments are expected to reduce development debt and provide funding for further growth, which I will elaborate on in a later slide.

Turning now to Slide 8. This shows our key operational metrics. Operational places have increased by 166 over the year as new homes open and refurbished places come back online. Our occupancy rate has been lower on average during fiscal 2019 versus the prior year, particularly in the second half. It was 92.8% at 30th June and that rate has since remained relatively stable as new places come online. Lower occupancy has been the main cause of our increased staff cost to revenue ratio, which was 73.6% in the second half, excluding the benefit of the temporary subsidy boost combined with wage EBA increases being greater than COPE increases.

Our average income in big contract prices have continued to increase over the year, most recently up to $378,100 benefiting from both new and refurbished homes coming online and increases in the underlying portfolio.

Moving now to Slide 9. We've provided details on our room prices and resident numbers and the composition and payment preferences of nonconcessional residents between RADs, DAPs and combinations. The pie chart on the right shows that the RADs, DAPs and combination trends have been relatively stable, moving less than 0.5% in any of the categories.

The chart below that shows the growth in absolute resident numbers during the year, including the decline following the announcement of the Royal Commission in September 2018 and the increase since December as greenfield developments ramp up.

As at 23rd of August, we had 3,969 residents, 40 more than at 30 June. The average incoming bed contract chart shows a relatively steady increase in room prices over the last 4.5 years.

Going now to Slide 10, which breaks down our RAD cash flows for the year. $27.7 million of our net RAD cash inflows were from mature homes with a strong performance in the first half, a slow third quarter following the quarter 2 occupancy fall, then a strong last quarter, which has continued into July.

RAD inflows from recent developments improved over the year with $5.7 million in the first half and $10.2 million in the second half. We expect RAD inflows and developments to continue to increase during fiscal 2020, particularly from the 3 greenfield homes commissioned in the October to December quarter and Robina Rise, which opened in July.

I'll now hand back to Andrew.

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Andrew Sudholz, Japara Healthcare Limited - MD, CEO & Executive Director [3]

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Thanks, Chris. I'd like to now spend some time discussing our key strategic initiatives in more detail as these underpin the future growth and incremental profitability of our business.

Turning to Page 12. Our strategy continues to be focused on developing new homes, upgrading existing homes and acquiring medium-sized portfolios and improving their care and amenity. Our current portfolio now comprises 50 operating homes across 5 states with 2 further developments under construction at Mt Waverley and Newport. We do have the further 6 greenfield developments not yet in construction and 2 regions where licenses are held but sites are not yet required.

We also have several brownfield development opportunities within the portfolio. We have grown the portfolio historically by the acquisition and integration of medium-sized portfolios, as you're aware. And those have contributed to over 1,000 additional places since listing as well as through 16 brownfield and greenfield developments contributing over 750 new places.

Our strategy does remain to grow the portfolio by development and acquisition, and we are currently seeing an increased number of opportunities presented to us as smaller Aged Care operators look to exit the industry, and particularly, as residential developers looks to dispose of the sites which are no longer viable as residential developments. I've also mentioned previously our strategy towards senior living, and we have a number of sites in our portfolio that we were looking to take advantage of and add value for the company in this sector.

I'd like to hand over now to Anthony to take you through our real estate initiatives.

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Anthony Rice, Japara Healthcare Limited - CIO [4]

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Thanks, Andrew, and good morning, everyone. Turning to Page 13. We've set out some information on our development pipeline, which, as Andrew mentioned, underpins our future growth and profitability.

The chart on Page 13 summarizes our development pipeline, which currently comprises over 1,100 net new beds that we expect to deliver by the end of financial year 2022. We have 7 brownfield and 8 greenfield developments planned along with the significant refurbishment of another 6 homes. We manage our pipeline as such that it delivers approximately 300 beds per annum on a consistent basis to ensure effective facility construction and commissioning with internal resources and that our fixed development debt is kept within prudent levels. Some of the key changes to our pipeline since our last update at the half year include: the addition of a new greenfield development on the Gulf Coast where we were awarded licenses in the 2019 ACAR; the addition of brownfield developments at our Kelaston and Lower Plenty homes; a slight deferral of our planned development completions at our Albury, Newport and Brighton developments; and slightly adjusting the expected completion dates for our Belrose, Highton and Lysterfield greenfield developments.

We have provided our usual comprehensive development pipeline details in the appendices, which we don't propose to cover in detail now, but we would note that we continually evaluate our pipeline with regards to a number of considerations, including financial and operational factors and the market environment.

We have set out, on Page 14, a case study on our most recently completed greenfield development Robina Rise in Robina on the Gulf Coast, which, as Andrew mentioned earlier, we opened in July of this year. Robina Rise is Japara's 50th home, and the 106 single rooms have been designed to include smaller hubs within the building, creating a home-like environment. We purchased the 4,700 square meter site in January 2017 for $5.1 million and commenced construction in May 2018. The total development costs, excluding land, was $28 million, and the home includes a 16 place, small house memory support hub, an on-site café, a beauty salon, a bar and theatre as well as a rooftop garden and entertainment space.

We opened Robina Rise on the 16th of July, and its first month of operations has been a credit to the commissioning and operations teams, with the home currently caring for 55 residents.

Turning to Page 15. In addition to the recent Robina Rise launch, we also opened 3 new greenfield developments during the 2019 financial year at Rye, Glen Waverley and Brighton-Le-Sands. We have been pleased with the performance of these new homes, with Rye Sands currently caring for 70 residents, and both the Highbury and Glen Waverley and our new Brighton-Le-Sands home achieving portfolio average occupancy levels within 9 months of opening. Our Mirridong home in Bendigo, Victoria, also opened a 16-room extension in October 2018, and our Kingston Gardens home in Springvale South in Victoria underwent expansion during the year, with a new 68 place extension opening in September 2018 and the further refurbishments of the existing 60 place home underway.

Page 16 outlines our progress on near-term developments, which includes the stage 2 refurbishment of Kingston Gardens, which we expect to open in September of this year, and a 14 place extension and significant refurbishment of Strzelecki House in Mirboo North, which we also expect to complete in September of this year. Construction is well underway on our developments in Mount Waverley, Melbourne, which will comprise 105 places and also at our Brighton-Le-Sands home where stage 2 of the development of this home will deliver an additional 25 places in early 2020.

During the year, we received development approval for 3 greenfield developments at Belrose in Sydney for a 102-bed home, at Lysterfield in Melbourne for a 90-bed home and at Highton in Geelong for a 122-bed home. We were also pleased to secure land adjacent to 2 homes for future brownfield development in June of this year, with 2,500 square meters of land secured adjacent to Japara's Elanora home in Brighton, Victoria and 1,200 square meters of land secured adjacent to our home in Oaklands Park in Adelaide.

I'll now hand back to Chris to discuss our development funding.

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Christopher Murray Price, Japara Healthcare Limited - CFO & Company Secretary [5]

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Thanks, Anthony. I'm on Slide 17. Japara has made a significant investment in its development pipeline to underpin future earnings growth, with future rates expected to reduce debt and provide funding for further expansion. The table on the top right of the slide highlights that we expect to receive a further circa $100 million in RAD inflows from recently completed or nearly completed developments that will require only a further $6.4 million in capital expenditure. The net $90 million-plus surplus will be available to reduce development debt or reinvest in further growth.

Similarly, 2 further greenfield developments currently under construction, Mt Waverley and Newport, are expected to contribute a further $68 million in RADs versus further capital cost of $47 million, providing a surplus of $21 million.

The above compares to current development debt of $134.5 million. The bottom chart shows the book value at costs of vacant land we fully own. We hold licenses for those we intend to develop, except reservoir. We had a further approximately 500 licenses and approvals. We believe that developments continue to provide attractive risk-adjusted returns if undertaken in appropriate locations.

I'll now hand back to Andrew to discuss some industry and business observations.

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Andrew Sudholz, Japara Healthcare Limited - MD, CEO & Executive Director [6]

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Thanks, Chris. Turning to Page 19. The Aged Care industry has clearly faced another challenging 12 months. The Royal Commission into Aged Care Quality and Safety commenced earlier this year, and hearings have occurred in most states and territories. There have also been community forums allowing for direct community access to the commissioners, which has been excellent.

Japara gave evidence to the Royal Commission in Perth in late June 2019. The focus was on the delivery of person-centered care at our Mitcham home in South Australia, and our processes to meet obligations for compulsory reporting of reportable incidents to the Department of Health. The commission's interim report is due at the end of October 2019, with the final report expected in April 2020.

The federal government implemented a $320 million temporary subsidy boost from the 20th of March this year via an increase in the rate of residential care basic subsidies of approximately 9.5%. We received an additional $7.9 million from the subsidy boost, which ceased on the 30th of June, 2019. The industry has also transitioned to the new Aged Care quality standards from the 1st of July 2019. These standards replace a number of existing standards, including the accreditation standards, home care standards and transition care standards. Japara undertook a comprehensive transition plan, including reviewing all of its current policies and procedures against the new standards and implemented an online education program to help train our over 5,600 staff in delivering care in line with the new standards.

Finally, in March of this year, the University of Wollongong issued several reports known as the RUCS reports with recommendations on changing the government Aged Care funding structure, which is a reallocation element. The purpose of this study was to determine the characteristics of residents that drive residential care costs and use this information to inform the government's consideration of future reform options. Trials of the Australian National Aged Care Classification, known as AN-ACC, assessment model, which was considered by the RUCS report and which uses an external workforce to assess the care needs of residents are expected to commence in late 2019.

Maintaining occupancy has been a challenge for the industry recently, and that has been outlined in the chart on Page 20 of the pack. This chart shows government reported overall sector occupancy since 2016 -- 2006 in the dark gray line and also the more timely occupancy reported by MIRUS Australia, a consultant for the Aged Care industry, in the light blue line. The overall annual increase in the number of net places in the industry is shown in the light gray bar against the right-hand axis. Sector occupancy has declined over the past 4 years, which is particularly evident in all the facilities as the supply of new places has exceeded growth in resident numbers.

We anticipate overall sector occupancy to [peak] at around 89.5% as at the 30th of June 2019, which is down from 90.3% in 2018. In FY '20 -- in the FY '20 year to date, we have experienced stable occupancy levels at around 93%, which is better than industry average.

Turning to Page 21. We have provided some industry information on acuity in the residential aged care sector. Residential care acuity has increased over time based on the appraised care needs of a resident by applying the aged care funding instrument, known as ACFI, across the 3 ACFI funding categories. This was until 2017 when government scoring changes reduced the measure of acuity in the complex health care domain, which has impacted overall sector funding. Amongst other things, these charts reflect the focus of the industry on caring for higher-acuity residents, which is relevant when you turn to the following page, which is 22.

Page 22 provides a little bit more data on the question we have been asked more frequently over the last 6 to 12 months being, what impact is the increased number of home care packages being issued by the government having on the [residential] aged care sector? In line with the focus on higher-acuity residents over the past 10 years, the overall percentage of the population of over 70 being cared for in residential aged care has steadily decreased from around 8% to closer to 7% currently, as shown on the chart on the left of Page 22. Interestingly, this rate of decline does not appear to have been materially impacted by the recent increased provision of home care packages, which has mainly been in level 2 packages, and which provide a [recipient] with up to $15,000 per annum to spend on home care services. $15,000 per annum provides for only 3 to 4 hours of care per week, and we do not believe this competes with the 24-hour care, 7 days a week, which is provided in our residential aged care sector.

Turning to Page 23. We have provided industry information on key revenue and cost growth in the residential aged care sector. Shown on the chart on Page 23 in the orange line is the annual indexation of the ACFI instrument over the past 8 years. As you can clearly see, the increases in funding have not kept pace with the increases in our largest expense item, being staff wages with the annual escalation in the Age Care Award of 2010 shown in the dark gray line. This negative jaws has been particularly evident over the last 2 years, where there has also been no growth in funding through increased acuity.

In summary, and turning to Page 25. The FY '19 -- in FY '19, Japara experienced strong earnings growth from recently completed greenfield and brownfield developments and refurbishments, and earnings were also boosted by the 2018 Riviera Health portfolio acquisition, which contributed to a full 12-month period.

Our EBITDA of $49.6 million was down on FY '18 by 2.2%, largely due to nonrecurring items, with recurring EBITDA increasing by 2.5%. Our balance sheet strength was maintained with net debt -- net bank debt of $179 million as at the 30th of June, 2019, and available liquidity of $166 million. We expect our FY '20 EBITDA to be 5% to 10% lower than in FY '19. This is a reflection of the funding environment, which continues to present challenges, and occupancy levels which remain below historic averages at the present time. Our recently completed developments are expected to help mitigate industry headwinds as they contribute a full year of earnings, and annual active indexation is expected to partially offset annual wage rate increases. We continue to focus on the delivery of high-quality developments with over 300 net new places expected to be opened in FY '20, and we expect increased cash flows due to RAD inflows underpinned by higher bid contract prices.

That concludes our full year results presentation for FY '19.