Orpea - requires more care?
All,
Please find our first analysis of Orpea here.
The headlines at the beginning of the year that surrounded Orpea were linked to possible maltreatment of residents of their nursing homes. This has brought unwanted attention to the Group but shouldn’t distract from the perilous state Orpea found itself in relation to its liquidity with near-term debt and committed capital expenditure exhausting its liquidity. Orpea have recently concluded a Conciliation Process which has ensured the viability of the Company over the coming years. Although the liquidity problem is solved by the new facilities, several other issues still remain with the Company. We explore these issues and the attractiveness or otherwise of Orpea's unsecured bond debt in the current yield environment.
Conciliation Process:
- In April 2022, Orpea was facing significant financial issues, including CAPEX commitments of €900m in FY22 and FY23 and upcoming maturities including €850m in H2 2022 and €983m in FY23. Therefore, the Company entered into a conciliation Procedure to overhaul their finance.
- Orpea announced an agreement in principle with its core banking pool, including BNP Paribas, Credit Agricole, Credit Mutuel, Groupe BPCE, La Banque Postale and SocGen). The agreement in Principle is part of the amicable conciliation procedure opened by order of the Nanterre Commercial Court on 20th April 2022.
- The key principles included a new financing plan via a secured syndicated facility of €1.733bn (adjusted to €1,729m). The new financing plan includes a commitment to maintain a minimum cash level of €300m to be tested quarterly from June 2023.
- These new facilities benefits from a pledge over the shares of the subsidiaries ORSEA 25 (Lux) which now holds Clinea and CEECSH (Lux), which represent 25% and 32% of the Group's revenue.
Property (leased or owned):
- Historically, Orpea has tried to retain a large proportion of ownership of its properties to ensure greater flexibility around upgrades etc and increase the asset valuations. Additionally, the Group develops new purposely built assets in prime locations.
- As part of the spree of acquisitions, the real-estate ownership fell to 32% in 2014. Therefore, in the period of 2015-2019, the strategy was to increase the ownership rate to its historic levels of c.50% by purchasing operated buildings, selling fewer buildings and focusing its acquisition policy on opportunities with real estate attached. At the end of 2020, the ownership rate stood at 47%.
- The Group's real estate portfolio is financed by long-term loans and by property leases. Orpea is a lessee under several property leases. Lease financing is the Group’s preferred method because it gives it the option of acquiring ownership of the property after 12 to 15 years in return for a modest residual payment.
- The problem is that we have been unable to reconcile the balance sheet assets and right of use assets with this supposedly 50:50 split in owned: leased ratio. Orpea has created additional opaqueness to their structure by separating owned property into holding companies and partially and fully selling these companies to external buyers leaving Orpea as the lessee in these transactions.
Recent Trading:
- Orpea only report numbers half-yearly numbers so the last set of numbers were for FY21. FY21 numbers had improved over FY20 as other costs (ex Staff) had started to reduce. This is due to lower Covid impact.
- Overall revenue increased both organically and in aggregate due to improving occupancy rates versus FY20.
- However, more importantly, there has been a significant change in management of the Group. A new CEO has been appointed (Mr Laurent Guillot) plus 3 other new directors who will be proposed to the Board at the next General Meeting in late July. Mr Guillot was former Deputy CEO of Sant-Gobain.
- At the release of FY21 numbers, the Company released Q1 revenue numbers which show growth of 9% or 5% organic growth. Occupancy rates in Q1 2022 remains higher than Q1 2021 at the Group level, despite a lower rate in France.
Outlook:
- This evening, Orpea released its Q2 revenue numbers which is in line with our top-line assumptions. However, top-line is not the main issue, with Orpea reiterating its operating profitability will be impacted in FY22 by the inflationary environment.
- In addition, Orpea is facing exceptional costs relating to the management of the crisis and its consequences.
- Additionally, the Company has stated that entities in Belgium that previously reported numbers on the equity method are now fully consolidated. Belgium has 67 sites with 7k beds but we are unsure of how many of these beds were not fully consolidated. We await the full release of H1 numbers in late September for full clarity.
Investment Considerations:
- We are not taking a position in Orpea currently. There are many reasons for this, but mainly the current yields on offer (10-14%) is not sufficient to compensate for the opaqueness of the financing and ownership structure.
- In addition, the new facilities, plus additional facilities which are required to meet the €900m CAPEX spend in FY22 & FY23 will continue to take security and ultimately lead to the bonds been further subordinated (contractually).
- The Company provide very little data on the operational performance of the business with no occupancy level data nor profitability data on a regional basis. We have attempted to clarify the positioning of the various real estate assets and liabilities but with the limited disclosure, this has proved difficult.
Happy to discuss
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk