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Edited Transcript of JHC.AX earnings conference call or presentation 27-Feb-20 11:30pm GMT

Half Year 2020 Japara Healthcare Ltd Earnings Call

Southbank Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Japara Healthcare Ltd earnings conference call or presentation Thursday, February 27, 2020 at 11:30:00pm GMT

TEXT version of Transcript


Corporate Participants


* Andrew Sudholz;Chief Executive Officer and Managing Director

* Anthony Rice

Japara Healthcare Limited - CFO & CIO

* Christopher Murray Price

Japara Healthcare Limited - CEO, MD & Director




Operator [1]


Ladies and gentlemen, thank you for standing by, and welcome to the Japara Healthcare Limited FY '20 Half Year Results Briefing. (Operator Instructions) Joining us on today's conference, we have Andrew Sudholz, Chief Executive Officer and Managing Director; Chris Price, Chief Financial Officer; and Anthony Rice, Chief Investment Officer. (Operator Instructions) Please be advised that this conference is being recorded. I would now like to hand the conference over to your first speaker, Andrew Sudholz. Thank you. Please go ahead.


Andrew Sudholz;Chief Executive Officer and Managing Director, [2]


Thank you. Good morning, everyone, and thank you for joining us today for Japara Healthcare's first half 2020 results briefing and company update. I'm Andrew Sudholz, the CEO and Managing Director of Japara Healthcare. And joining me today are 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 6 months, following which Chris will provide a more in-depth analysis and explanation of our earnings and operational results. Then Anthony will spend some time discussing our real estate initiatives before I provide some broader observations of the aged care industry and provide an outlook for the remainder of the 2020 financial year. Then we'll open up for questions after that.

Turning first to the key highlights for the year, which are outlined on Page 4 of the pack. Our cash flow performance for the year was strong as we continued our program of investment in both business operations and our development pipeline to underpin our future growth and provide enhanced outcomes for our growing resident numbers. Our growth in occupied places and portfolio management of real estate boosted earnings and offset the impact of the challenging industry-wide occupancy conditions. Our total revenue was up almost 10% on the prior corresponding period to $212.6 million due to the additional places from recent developments coming online, combined with proceeds from asset disposals and government funding increases through indexation. EBITDA was also up 10% on the prior corresponding period. However, recurring EBITDA declined by 11% due primarily to the lower occupancy I talked about. Net profit after tax of $5.4 million was down 28% on the first half of 2019 due to higher depreciation and interest costs from our development pipeline. However, it should be noted that this development program will provide future revenue growth for the company as new places are occupied, and we're seeing good results in that area.

We are pleased to maintain our 100% accreditation record with 20 Aged Care Quality and Safety Commission inspections during the 6 months. A significant volume of industry net place additions over the past year has created challenging occupancy conditions with our underlying occupancy lower than the prior corresponding period averaging 92.6% for the half. Our occupancy, however, remains higher than the industry average of below 90%. That's the industry average particularly as we experienced strong resident demand from our newest state-of-the-art homes. As of yesterday, our occupancy had increased to 93% as we experienced the typical holiday post-season increase in resident profile. We supported the future growth of our business via a net investment of almost $52 million in land and improving our existing and developing new aged care facilities. This activity was financed from our strong net RAD cash flows, which is very pleasing. And these totaled $33.4 million for the year and also by utilizing debt with our drawn down debt totaling $185 million as at the 31st of December 2019. RAD inflows from our recently completed greenfield and brownfield developments are expected to reduce development debt and provide funding for further growth.

Turning to the next page. I'd like to spend a minute discussing Japara's commitment to the quality of care, as this is -- this underpins everything that we do. 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 4,100 residents. We have registered nurses roster 24 hours a day in every home, and we spend in excess of 100% of all care revenue received on costs associated with the provision of their care in operating the business. We provide tailored leisure and lifestyle programs across all homes and fresh food preparation underpins our approach to dining.

We have continued our record of 100% accreditation at all of our homes. We are also a proud leader in dementia-specific care with a significant number of our homes providing specialist memory support units. Our dementia model -- our dementia care model promotes independence, personal choices and quality of life with residents and is encouraging to live life as usual. These purpose-built memory support units include technology to enhance care, including virtual reality experiences and our dementia lifestyle and behavior consultant supports Dementia Champions and our staff in every home.

Now turning to Page 6. We saw the efforts being put into our development program become more tangible with our 50th home in Robina opening in July, and which has attracted new residents ahead of our projections.

We are also well into construction on our next 3 greenfield developments at Mt Waverley, which will provide an additional 105 new places; Newport, which will provide an additional 120 new places and at Belrose in Sydney, which will provide an additional 102 new places. Greenfield developments continue to provide attractive returns and strong occupancy when located in undersupplied geographies. We completed extensions to our Brighton-Le-Sands home, Kingston Gardens and Mirboo North homes, adding 103 places in total and have 5 significant refurbishment programs currently underway. 5 of our homes currently have co-located senior living accommodation and a further 3 sites are currently in advanced planning for the development of additional senior living accommodation.

As some of you may be aware, we have recently appointed Stuart Nicolson, as Head of our Senior Living business, and Stuart will drive the growth of this business across the continuum of care environment. We now have a dedicated workforce of almost 6,000 staff, providing care 24 hours a day, 7 days a week to over 4,000 residents across our homes throughout Australia.

We continue to focus on hiring, retaining and training the best people with comprehensive development programs for our clinicians, home managers and other care staff. We have also recently made significant investments into a new digital learning platform and human capital systems to support our business functions, which I will talk about later.

I will now hand over to Chris, who will take you through our financial and operational results.


Christopher Murray Price, Japara Healthcare Limited - CEO, MD & Director [3]


Thanks, Andrew. I'm on Slide 7, which sets out our EBITDA bridge in the first half of fiscal 2019. EBITDA grew by 10% over the first half '19, supported by additional places from developments and portfolio management of real estate assets. Recurring earnings decreased as ongoing negative jobs impacted EBITDA. Annual wage rate increases of approximately 2.5% and non-wage cost increases driven by higher utility insurance costs significantly exceeded government funding growth by ACFI indexation of 1.4%. Investment in new developments and home refurbishment is providing additional earnings, and we will touch on these initiatives later in the presentation at Section 2.

We have also isolated the impact of lower occupancy, which equates to $2.1 million over the half. Average occupancy in the first half fiscal '20 was 92.6% versus the first half of fiscal '19 occupancy rate of 93.6%. Spot occupancy at 31st December '19 was 92.5%, and it has increased to 93% as of yesterday.

The direct costs to the Royal Commission were $1.1 million. And the earnings, we jump Page 7 that are included in the net nonrecurring items. Finally, the implementation of the new lease accounting standard AASB 16, contributed $1.3 million to first half '20 EBITDA with a $1.6 million offsetting impact to depreciation, amortization and interest costs and the like primarily to trade leased premises.

From a leasehold perspective, the application of AASB 16 and 15 as they relate to resident agreements and rent payments resulting in immaterial adjustment to revenue is our assessment used in lease term equates to our resident 7-day notice period.

I'll turn now to Slide 8. First half 2020 NPAT was impacted by development activities, which result in full depreciation and interest costs, while the home EBITDA is still growing during the ramp-up phase. Lease accounting implementation also increased amortization and net interest expense during the half. Capital invested during the year in expanding and enhancing the portfolio related to land, greenfield and brownfield developments and refurbishing existing homes had amounted to $51.7 million. Net prepayments of $18 million include advance receipt of January 2020 government funding and payment of annual workcover premiums and insurance costs.

Our 5-year $345 million syndicated loan facility was established in December 2018. Total net bank debt was $185.3 million at 31 December 2019. Its core net debt remaining modest at 0.6x FY '19 EBITDA. We have available liquidity of $160 million.

RAD 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.

Now turning to Slide 9, which shows our key operational metrics. Operational places have increased by 150 over the half as new developments opened and refurbished places came back online. Staff costs to revenue remained stable at 72.4% compared to the second half of FY '19 as new developments in refurbished places are opened. Occupancy increased from second half '19. Government revenue grew underpinned by COPE and increased accommodation supplement funding from previously refurbished places also boosted income. Our average incoming bed contract prices were slightly higher over the half, averaging almost 383,000 per place, benefiting from both new and refurbished places openings. Our strong net RAD cash flows were also supported by increased place numbers.

Turning to Slide 10, where we have provided details on our room prices and resident numbers and the composition and payment preference of nonconcessional residents between RADs, DAPs and combinations. The bar chart on the top right shows that RAD, DAP and combination trends over the past 3 years, which have been broadly stable, although a slight trend to DAPs from RADs has been evident, influenced in part by increased new and redeveloped places opening.

The chart below shows the growth in absolute resident numbers during the last 18 months reflecting increased available operational places as greenfield developments ramp-up. As of 27th February, we had 4,127 residents, reflecting an increase in occupancy of 0.5% since 31 December. The average incoming bed contract chart shows a relatively steady increase in room prices over the last 5 years.

I'll turn now to Page 11. This breaks down our RAD cash flows for the half. Net RAD inflows in the half from the mature portfolio were $9.3 million and net RAD inflows from recent greenfield and brownfield developments were $26.4 million. We expect continued RAD inflows from the developments during the remainder of fiscal 2020 particularly from the 3 brownfield homes recently commissioned at Mirboo North, Brighton-Le-Sands and Kingston Gardens, and greenfields being Robina Rise which opened in July 2019 and The Regent once it is opened in April 2020. I'll now hand back to Andrew.


Andrew Sudholz;Chief Executive Officer and Managing Director, [4]


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 the incremental profitability of our business.

I'm turning to Page 13. Our strategy continues to be focused on developing new homes, upgrading our existing homes and importantly, expanding our business across the continuum of care environment.

Our current portfolio comprises over 5,000 existing or soon to be constructed aged care places with several co-located senior living communities and developments. We have 50 operating homes across 5 states with 3 further developments under construction, which I mentioned before, being Mt Waverly, Newport and Belrose. We have a further 4 greenfield developments not yet in construction and 2 regions where licenses are held, but sites are required, and we are negotiating on those at the moment.

We also have several brownfield development opportunities within the portfolio. So greenfield and brownfield developments continue to provide attractive returns and strong occupancy when located in undersupplied geographies.

Japara is also expanding our operations on a co-located basis with residential aged care homes to provide for future consumer demand. Our senior living portfolio comprises currently a total of 180 independent living units and apartments, co-located with 5 of our aged care homes. We do own a further 3 sites, which are in advanced planning for additional senior living developments that will substantially increase the size of our senior living portfolio.

Our senior living business positions the company to a greater degree on the consumer funded market and is expected to provide incremental earnings for Japara over the medium term.

So if we turn to Page 14, a significant part of Japara is caring for residents living with dementia and approximately 52% of aged care residents in Australia are now living with dementia and will experience complex behaviors associated with their dementia. Japara is implementing innovative small home environments for residents living with dementia in our facilities. This model is based on global best practice and compliments resident autonomy and quality of life while reducing complex behavior and the use of psychotropic medications. Increased staff training and capacity to respond to complex behaviors associated with dementia and including Dementia Champions in our homes, provides much better outcomes for our residents.

We have also made a significant investment in information technology to support our existing business and our expansion program. We have WiFi installed in all rooms in Japara homes, and we are implementing an enhanced electronic and clinical medication management system, which frees up staff time to enable them to provide more care for our residents. The implementation of our workforce management system to improve roster efficiency and continued compliance with our EBAs is largely complete and the rollout of our Japara Cares app to rapidly train all staff in the new Aged Care Quality Standards has been successful.

Japara has a robust corporate and clinical governance overlay. Japara's Zero Harm Board Sub-committee specifically monitors, challenges and guides management in relation to areas of clinical governance, workplace health and safety and the environment. The Zero Harm committee is chaired by clinical professor and board member, Leanne Rowe.

I'd now like to hand over to Anthony to take you through our real estate and senior living initiatives in more detail.


Anthony Rice, Japara Healthcare Limited - CFO & CIO [5]


Thanks, Andrew, and good morning, everyone. Turning to Page 15. We've set out some information on our near-term development pipeline, which, as Andrew mentioned, underpins our future growth and profitability.

The chart on Page 15 summarizes our development pipeline, which currently comprises 844 net new beds that we expect to deliver by the end of the financial year 2022. We have 4 brownfield and 7 greenfield developments planned, along with the significant refurbishment of further 5 homes. We manage our pipeline 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 peak development debt is kept within prudent levels. Some of the key changes to our pipeline since our last update at the full year results include: the completion and opening of developments at Robina, Mirboo North, Brighton-Le-Sands and Kingston Gardens, comprising 209 places. The decision to discontinue with the proposed development at Highton, Geelong with the process underway to recycle the capital invested in this project into other initiatives.

The acquisition of a 9,200 square meter development site at Hope Island on the Gold Coast for a future 105 place home, and the extension by 5 years of the lease at our existing 60 place Yarra West home, a Newport development, a new 120 place home originally proposed as a replacement for the Yarra West is expected to open late 2020. And with the Yarra West now remaining open, the net places added for Newport increased from 60 to 120.

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 regard to a number of considerations, including financial and operational factors and the market environment.

As Andrew mentioned, in addition to our aged care portfolio and development pipeline, we also operate co-located senior living accommodation at 5 sites, with a further three sites within the portfolio of having the capacity for future senior living accommodation development.

Page 16 summarizes our existing senior living portfolio, comprising a total of 131 independent living units at Balmoral Mews in Geelong, Barongarook Gardens in Colac Victoria, and Cosgrove Cottages adjacent to our Sandhill Home in Launceston.

We also operate a further 49 independent living apartments, located at Japara Homestead in Adelaide and adjacent to our Japara Millward Home in Doncaster in Melbourne.

Japara also owns several sites where senior living developments are planned, providing the opportunity for development profits and the creation of future income streams.

We have summarized our senior living development pipeline on Page 17. We recently acquired 2,500 square meters of land adjacent to our Elanora Home in Brighton, Victoria. This provides the opportunity for redevelopment of the existing aged care home, which we expect will release approximately 8,000 square meters of surplus lands for senior living development.

Now George Vowell Home in Mt Eliza has 6 hectares of land adjacent to the existing aged care home upon which we are in the planning and design phase for senior living development of approximately 100 units. We also own surplus land at our Cosgrove Cottages Community in Launceston where an existing planning approval is currently being amended for a further senior living development of 50 units.

We have set out on Page 18, a case study on our most recent greenfield development, The Regent in Mt Waverley, Victoria, which, as Andrew mentioned [area] will open in April of this year. The Regent will be Japara's 51st home and the 105 single rooms have been designed to include smaller hubs within the building which creates a homelike living environment.

We aggregated the 5,450 square meter site in 2015 and 2016 for a total cost of $8.2 million and commenced construction in October 2018. The total development costs excluding land is projected to be $33 million. And this light-filled home backs onto Valley Reserve and Scotchmans Creek, offering a variety of accommodation types, complemented by an in-house cafe & bar, external terraces, balconies, a cinema, a beauty and well-being hub and a gymnasium.

Turning to Page 19. In addition to the recent Robina Rise greenfield development launch in July, we also opened 2 significant brownfield developments during the half year at Brighton-Le-Sands in Sydney and Kingston Gardens in Springvale in Melbourne. The Brighton-Le-Sands extension opened in January 2020, adding 25 places to the existing 60 place home, which was opened in September 2018. Occupancy is ramping up as expected, with 65 residents in total in the now 85 place home.

Our Kingston Gardens expansion opened in November 2019 and added 60 refurbished places to the recently developed 68 place extension which was also opened in September 2018. Occupancy is ramping up ahead of expectations with 90 residents in total in the extended 128 place home.

Page 20 outlines our progress on our near-term developments, which include our new homes at Rye and Robina, which are both showing strong occupancy. As we have already touched on the progress of most of these developments, I'll now hand back to Chris to discuss our development funding.


Christopher Murray Price, Japara Healthcare Limited - CEO, MD & Director [6]


Thanks, Anthony. I'm on Slide 21. 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 bottom left of the slide highlights that we expect to receive between $135 million to $145 million in additional RAD inflows from recently completed or nearly completed developments that require only a further $27 million in capital expenditures to complete. A net $110 million plus surplus will be available to reduce development debt or reinvest in further growth. The above compared to current development debt of $155 million. The bottom right chart shows the book value at cost of vacant land we fully own. We hold all licenses required for those sites. We have identified for the development of net new aged care places except [Reservoir] 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.


Andrew Sudholz;Chief Executive Officer and Managing Director, [7]


Thanks, Chris. Turning to Page 23. Obviously, the aged care industry has faced another challenging period. The Royal Commission into Aged Care Quality and Safety continues, having delivered its interim report in late October 2019. The Royal Commission will be holding hearings now throughout March and through to May, and the commissioners continue to indicate they believe their recommendations will be well prosecuted through the hearing process and they do not anticipate the final report will contain any surprises.

The commissioners are required to provide a final report by 12th of November 2020. Japara has incurred direct costs relating to the Royal Commission of $1.1 million for the first half of FY '20, in addition to direct costs of $1.8 million in FY '19.

The federal government has announced the aged care allocation round of an extra 10,000 new places, opening in March 2020, and Japara will be applying for places in the 2020 ACAR in line with our brownfield and greenfield development strategy. As you may be aware, Japara has recently had several of their homes impacted by both bushfires and floods. While some staff in particular have been personally impacted, all residents and staff have been kept safe throughout the events and no evacuations have been required.

The efforts of our staff and the border emergency services teams are to be commended and we express our sincere thanks to all those involved.

Turning to Page 24. We provide some industry information on the growth of government funding in the residential aged care sector. The chart shows the average rate of the aged care funding instrument or ACFI per resident per day for the industry overall since 2014. The orange line shows the government's projected ACFI rate and the dark gray line shows the actual rate funded. Scoring changes in 2017 introduced as part of the 2016 federal budget, reduced measures of acuity in the complex health care domain, which has impacted overall sector funding.

Industry expectations based on government funding projections for ACFI not been realized with current actual ACFI rates running below government projections. Government funding cuts and revenue boost, like the one we received last year in the sector have typically been preceded by periods of divergence between the government's projected ACFI rate and the actual rate funded.

Maintaining occupancy has been a challenge for the industry recently, as outlined in the chart on the left of Page 25 of the pack. This chart shows monthly occupancy as reported by Mirus Australia, a consultant to the aged care industry in the dark gray line. Sector occupancy has declined over the past 4 years, and this is particularly evident in all the facilities as the supply of new places has exceeded growth in resident numbers.

The chart on the right of Page 25 shows the seasonality of occupancy, which tends to increase post the summer holiday season and then declines from the middle of the year. Whilst Japara's occupancy has decreased from a historical average of around 94.5%, we do continue to outperform the industry's average occupancy rate. In general terms, we are experiencing higher occupancy in our newer homes. And from what we have seen in the sector, it is the older aged care facilities that are now facing occupancy challenges. Japara's research team identifies undersupplied regions, and it is in those locations where we develop our new homes to meet the strong demand, and this underpins our high occupancy rates.

The supply of net new places has been particularly strong over the past 3 years and the Australian Bureau of Statistics aged care building approvals and construction work done data series suggests continued strong net place additions will occur over the next 12 to 24 months. This is illustrated in the chart on Page 26 which plots annual net place additions in the light gray bars against rolling annual aged care construction work done advanced by 9 months in the orange line and rolling annual aged care building approvals advanced by 18 months in the dark gray line.

This supply will assist in meeting the demand for the increasing numbers of over 75-year olds, who comprise 86% of the residents in aged care homes.

Page 27 shows the Australian Bureau of Statistics projections for the growth in the aged cohorts of over 75 years. The proportion of individuals within each aged cohort living in residential aged care homes increases with age, with over 32% of individuals aged 90 and above living in residential aged care as of June 2019.

So in summary, and turning to Page 29, the first half of FY '20 for Japara, we experienced strong earnings growth from recently completed greenfield and brownfield developments and refurbishments. Our EBITDA of $24.3 million was 10% higher than first half FY '19, largely due to active real estate portfolio management with reoccurring EBITDA impacted by lower occupancy and cost inflation greater than revenue escalation. Our balance sheet strength was maintained with net bank debt of $185 million as at the 31st of December 2019 and available liquidity at $160 million.

We expect our FY '20 EBITDA to be around 10% lower than in FY '19. This is a reflection of the current funding environment, which continues to present challenges and occupancy, which remains below historic averages.

Our recently completed developments are expected to help mitigate industry headwinds as they continue to increasingly contribute to our earnings.

Interest and depreciation costs are also expected to increase slightly in the second half of FY '20 due to the recently completed developments.

We continue to focus on the delivery of our new state-of-art homes for our residents, and we expect strong cash flows from RAD inflows and underpinned by growth in operational places.

I thank you for your time.