Orpea has upsized its real estate impairments for FY 22 to €2.1bn from €1bn — broadly in line with 9fin’s prior expectations. In addition to those, management wrote down €2.7bn of goodwill, €0.4bn on financial receivables and €0.2bn on other balance sheet assets, to bring the total size of the impairments to €5.4bn.

Disappointingly, in their release management did not provide any update on the progress of securing much needed fresh liquidity in the form of secured debt and equity financing.

We have updated the numbers from our initial analysis in the two tables below to reflect the new impairments. We note this has made little change on our previous valuation analysis and conclusions because the size of the new impairments are broadly in our with our original assumptions.

Asset coverage

Following an in-depth review management announced some small changes to Orpea’s tangible assets, which stood at €8.4bn in FY 21. Namely, they removed €800m of furniture and equipment related to operated assets (which they no longer think should be included in the portfolio) and they added €500m of assets following change to the scope of consolidation of assets under construction and held for disposal. This put the FY 21 adjusted real estate value at €8.1bn.

Second, management upsized the real estate impairments to €2.1bn from the up to €1bn announced on 26 October 2022. The bulk of the revision was driven by an internal valuation exercise with undisclosed assumptions by management of certain assets (mainly of assets under construction, assets held in JVs and assets with specific characteristics such as small size or undergoing restructuring). The jump while significant was broadly in line with our expectations. Some of the impairment (€0.3bn) was also due to an increase in the average cap rate from 5.3% to 5.5% by the independent appraisers. While Orpea’s cap rate is now slightly higher than Korian’s (who hasn’t yet updated their Q2 22 cap rates of 5.3%), it is worth noting that year to date 2022 Korian has bought eight assets at a significantly higher 6.3% average cap rate, suggesting that care home operators reported cap rates might come under further pressure in 2023.

The revaluations leave Orpea with only €6bn of Real Estate value. This does not cover its €6.6bn guided debt at the close of its proposed restructuring — resulting in a massive 109% LTV — close to our original estimate of 101% LTV here.

The future value of the RE portfolio doesn’t change much – we estimate it will reach €7.6bn in FY 25. This considers the positive impact of the €2.5bn Capex spending spree on its development assets, as well as the ongoing depreciation of the asset base (in line with FY 21, we apply 3.1% depreciation-to-fixed assets ratio for the forecast period).

While the €7.6bn asset value pitted against €5.7bn of debt outstanding in FY 25 shows an improvement in asset coverage, it gives an LTV of 75%. This broadly matches our original estimate of 74% here, but we consider this level still very high when compared to peers.

Little equity value

The picture doesn’t change much when we try to derive Orpea’s potential equity value upside from its peer trading multiples. Orpea’s nearest comparator is listed peer Korian, which had historically traded at c.10x multiple but has since compressed to 7.6x (calculated using Korian’s €605m LTM Q2 22 EBITDA and €4.56bn EV based on €969m market capitalisation as of 23 December 2022 and €3.6bn net debt in Q2 22).

If we take Orpea’s generously guided EBITDA for FY 25 of €745m and apply the above 7.6x multiple, it gives us an EV for Orpea of €5.7bn in FY 25. This just about covers the estimated debt at this time and suggests at this distressed multiple there will be no equity value in the business.

We remind that prior to the sector revaluation, Median Kliniken’s debt financing earlier this year was based on a 10x multiple, with Voyage Care bonds in January marketed off a 11.8x multiple. If we assume that in a more benign macro landscape the sector multiples recover back to 10x, then the EV jumps to €7.4bn. But that’s just about in line with our estimates for the RE portfolio value, meaning there is little or no equity upside for the investors. We continue to view this as the best-case scenario as we see serious execution risk to Orpea’s business plan and profitability.

Background

On 26 October, Orpea issued a press release launching its second restructuring in 2022 under a court-supervised conciliation process. It confirmed the current debt structure and amortisation profile, the basic outline of its proposed restructuring and the level of required financing. The €2bn real estate disposal plan efforts were abandoned due to difficult financial conditions. It added that as part of its business review it will apply up to €1bn of impairments on its real estate assets. Management flagged up the possibility of further impairments to come. Our analysis of the conciliation process and press release can be found here.

On 15 November 2022, Orpea released an 86-page presentation and held a three-hour call detailing its ‘Refoundation Plan’. The bulk of the lengthy call was dedicated to management outlining how to rebuild trust with Orpea’s stakeholders. Those initiatives were said to be the main driver of the guided gradual turnaround in financial performance in 2022-2025, which we detailed in our article here.

We are hosting an exclusive webinar looking into how the restructuring of Orpea could take place. If you would like to request access to this event, please complete your details here.