DomusVi Q1 Revenue Rises 10.5% YoY to €594M; EBITDA Falls 11.9% to €52M Under Pressure From Rising Costs, Wage Inflation; Leverage at 7.3x

Care home operator DomusVi’s first quarter revenue rose 10.5% year over year to €594 million, primarily driven by organic growth. EBITDA for the period was 11.9% lower than at the same time last year at €52 million, under pressure from higher costs and in particular wage inflation. The EBITDA decline resulted in a 2.2 percentage point year-over-year margin contraction to 8.8%, although the company said this was in line with its outlook for 2023.

Declining EBITDA has increased leverage, which has risen to 7.3x from 6.9x at the same time last year. The company burned about €11 million of cash in the first quarter considering €37 million of free cash flow after maintenance capital expenditure minus €19 million for net investments (investment capex and M&A) and minus €29 million of interest payments. DomusVi drew down its €190 million RCF in full as a precaution given the recent turmoil in the banking system.

Late last month ratings agency Moody’s downgraded DomusVi’s ratings, reflecting the impact of cost inflation on the company’s performance and the time lag in passing through higher costs to customers. The downgrade also reflects tightening liquidity because the ratings agency believes that cash generation will be insufficient to cover debt amortizing in 2023 and 2024, although it conceded that liquidity is still adequate at this stage. Moody’s downgraded the company’s corporate family rating to B3 from B2, while also downgrading the company’s €1.17 billion term loan B, its €800 million term loan B2, and its €190 million RCF, all of which are due in 2026, to Caa1 from B3.

Although the company’s term loans and RCF mature in 2026, there is €80 million and €70 million of other financial debt amortizing in 2023 and 2024 respectively, including bilateral credit facilities and real estate debt, Moody’s highlighted.

However, the credit rating downgrade may be unjustified and delayed, some investors argued. It would have been more appropriate and timely to downgrade the loans to triple-C towards the end of last year, one investor said. Although leverage is high and liquidity has tightened due to margin squeezes driven by inflation, all of the company’s KPIs, in particular accommodation daily rates and occupancy rates, are moving in the right direction, and the group is finally able to pass through costs to customers, he said.

Across the care home sector, companies’ EBITDA margins have been under pressure from wage inflation and occupancy levels lagging pre-pandemic levels for most of the last two years, which has pushed up leverage. DomusVi also faced additional transaction costs related to acquisitions and slower integration and ramp-up than expected, according to a report from S&P published last November. The group was facing medical staff shortages in France, which together with a revaluation of the minimum wage, were driving up wage costs, the report added. There have also been recruitment difficulties in Spain and Ireland as a result of competition between public and private sectors.

DomusVi provides services and care for people weakened by age or illness. The group offers home care (13% of revenue), senior residence (8% of revenues), and nursing homes (76% of revenue). The company’s two key markets are France and Spain, in which it is second and first in the market, respectively. France contributed to 56% of first quarter revenue while Spain provided 32%. The group also has activities in Germany, the Netherlands, Ireland, Portugal, and in Latin America. As of the end of March, DomusVi had 577 facilities and 49,729 beds.

The company’s occupancy rate increased to 91.1% in the first quarter from 89.8% during the first quarter of 2022. Compared with the fourth quarter of last year, there was a decline from 91.7%, however DomusVi attributed this to seasonal effects. Accommodation daily rates rose to €85.20 in the first quarter from €78.70 at the same time last year.

Both metrics seem to be increasing further in the second quarter, with the occupancy rate at 91.5% in April (+1.4% from April 22) and the accommodation daily rate at €85.30 (+8.6% from April 22).

Although occupancy rates have improved following the impact of Covid-19, price increases haven't been sufficient to cover increased costs, another investor commented.

DomusVi’s 11.9% year-over-year EBITDA decline to €52 million was driven by inflation and Covid-19
compensations basis effects, investors said. Additional utilities costs of €4 million, food cost inflation of €3 million, and the end of Covid-19 compensations in Germany (€3 million) accounted for the majority of the variation in so-called other costs in the first quarter. Other costs exclude rent and personnel expenses and were 16.5% higher year over year at €97 million during the period.

First quarter personnel expenses increased year over year by 12.3% or 8% on a like-for-like basis to €376 million driven by both average cost increases and full-time-equivalent increases in the medical nursing home segments.

After French nursing home peer Orpea was accused of alleged mistreatment of patients last year, the main conclusion was that staff numbers across the sector had to increase, and there has also been wage inflation since then, however this increase in wage costs has not been reflected in prices, the investor explained.

Another key issue for care home operators is the proportion of their real estate that is leased because this results in pressure from rising rents or lease payments, another investor said. DomusVi owns real estate assets worth about €1.182 billion, of which around €700 million are freehold properties. Rents increased 14.8% or 6.3% on a like-for-like basis to €68 million in the first quarter driven by rent indexation. The company’s freehold properties could potentially be sold and leased back to support liquidity if needed, Moody’s noted.

Patient turnover is also important, the buysider noted. Prices are regulated and the fixed rate increases every year, but the company can only charge the new rate when an old patient dies and is replaced by a new patient. As a result, if turnover (deaths) is low, the group is unable to pass cost increases through to customers, the investor explained.

Moody's expects higher accommodation daily rates, continued recovery in occupancy rates, new openings and cost efficiencies to support deleveraging.

Free cash flow generation is likely to become positive in 2023 after capex peaks in 2022, S&P said. In keeping with this, investors noted that investment capex fell to €35 million in the first quarter this year compared with €40 million in the same period last year. However, Moodys forecasts that free cash flow will remain negative at around €50 million in 2023 before turning slightly positive around €20 million in 2024.

Debt amortization of around €80 million and €70 million in 2023 and 2024 respectively will weaken liquidity because of limited cash flow generation due to high level of development capex, including relocation and new openings, Moody’s added. However, the company has already secured €40 million of committed bank financing to cover part of the debt amortization in 2023, the ratings agency said.

The company had €164 million of available liquidity as of the end of the first quarter, after its €190 million RCF was entirely drawn.

Some investors said the company is likely to continue its strategy of consolidation, although they noted that the group said it expects fewer M&A transactions after completing a number of acquisitions over recent years, including in the Netherlands and France over the last 12 months. The company has also said it intends to delever this year and next year, investors said.

Financing for any further acquisitions will be supported by cash flow generation, sale and leaseback operations, and the sponsor's support, S&P said. However, continued acquisitions means there will be continued risks related to integration and integration costs, in addition to further erosion of cash, investors said.

The company and its term loan Bs are rated B by S&P.

DomusVi’s €1.17 billion term loan B is quoted at 87.4 according to Solve Advisors, down from around 95 on May 25, the day before the downgrade.

DomusVi’s capital structure as of March is below:
 

According to Reorg’s CLO database, DomusVi’s loans are held by the following managers. Click HERE to see the holders in the database.

 
To see the covenant analysis or to talk to one of our legal analysts, click HERE.

– Beatrice Mavroleon