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Southern Cross swaps FD after update

Monday, 30 June 2008

Southern Cross Healthcare has replaced finance director Jason Lock with immediate effect.

Lock had only relatively recently taken over from Graham Sizer finance director at the UK's largest care home operator. Sizer agreed to remain with the company until 29 February 2008 in order to achieve an orderly handover.

Lock earlier served as Southern Cross’ financial controller since joining the company in March 2003. He worked together with Sizer during Southern Cross’ successful IPO in 2006 and had been closely involved in the company’s financing strategy and acquisition activity since that time.

He holds a BSc (Honours) degree in Chemistry from Durham University. Lock will join the board of Southern Cross on 1 March 2008.

Funding to local authorities

His place will be taken by Richard Midmer, who was previously finance director of NHP plc, one of the few property investment groups in the UK specialising in the ownership of freehold or long leasehold interests in modern purpose-built care homes, the majority of which are leased to care home operators on long-term leases.

Southern Cross said in a trading update that although the overall occupancy in the group's homes had risen since the half year from 32,900 residents to 33,450 residents (90 per cent of all available beds) by 27 June, this increase has not happened at the speed nor to the absolute number of residents, originally anticipated by the company.

Central government funding to local authorities for social care has come through later than in previous years and the seasonal admissions increase has taken longer to occur.

These factors, when combined with higher than normal attrition rates of nursing residents, have resulted in lower than anticipated occupancy levels.

The company said that slightly lower occupancy spread across a large portfolio offered limited scope to reduce costs and explained that overall financial performance in the second half had therefore fallen behind expectations.

Full review

Southern Cross pointed out that it fourth quarter, which starts on 1 July, is traditionally the strongest and it expects occupancy to continue to improve, with a record number of residents currently in its homes and actual fee levels now averaging in excess of £530 per resident per week.

“Nevertheless, trading is unlikely to improve sufficiently to meet our original forecast. In addition, financial performance in the group's specialist subsidiary Active Care has remained significantly below forecast, due to lower occupancy levels and a high fixed cost base,” according to the board.

It said that a new management team had recently been appointed and is conducting a full review of the business.

As a result, the board now expects that Adjusted EBITDA is unlikely to exceed £80 million for the financial year to 30 September 2008, compared to £66.8million in 2007.

As part of its overall banking arrangements, the company has two syndicated credit facilities specifically for the purpose of funding additional acquisitions.

These facilities are currently drawn as to £82 million and are secured against a portfolio of 20 recently acquired and developed homes which are held for resale and leaseback.

One of these facilities, drawn as to £46 million, was originally due for repayment on 30 June 2008. It was intended that the property assets funded by this facility would have been sold before this date and the loan repaid.

Extension to the repayment date

While the company said it had received indicative offers in relation to certain of these assets, and was continuing actively to pursue their sale, they remained group assets for the time being.

Accordingly, the company, which is working closely in partnership with its banking syndicate, has been granted an extension to the repayment date and a waiver of an anticipated non-compliance with a financial covenant until 28 July 2008.

This period will allow the group to pursue the potential sale of some or all of these assets and/or suitable amendments to its overall longer term funding arrangements.

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