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GMB Response To Reports That 200 Southern Cross Care Homes May Close As It Seeks £100m To Prevent Collapse, UK

June 26, 2017

Playing politics, profits and interest rates with the welfare of 31,000 elderly and vulnerable residents who have served this country all their lives is totally out of order and is a modern outrage made even worse as there are also 44,000 jobs at stake says GMB

GMB the union for care staff responded to reports in the media yesterday that up to 200 care homes could be closed and that 50 were unfit for use as the company seeks to raise £100m to prevent collapse. See note 1 below for one report. Last week the company announced that landlords have been asked to agree to a 4 month deferral of 30% of the current rent charge with effect from 1 June 2011. See note 2 below for a copy of that statement.

In March 2011 Southern Cross said its current rent burden was unsustainable and that it intends to step up discussions with landlords to seek lower rents. Overcharging on rent amounts to £60 per week per care home bed and totals £100 million a year.

On 14th April the company held a first meeting with its principal landlords to discuss the financial restructuring of the business. The meeting, attended by 20 of the Company's landlords, representing 92% of its homes, clearly outlined all of the options available to landlords. On May 12 there was a second meeting. Landlords were asked to agree to a 4 month deferral of 30% of the current rent charge with effect from 1 June 2011. The Company said it had the support of QIA owned NHP, the Company's largest landlord and the other principal landlords to form an official committee to act as an efficient conduit for the restructuring discussions and to ensure that negotiations continue to progress in a timely manner. This committee will be chaired by Daniel Smith of Grant Thornton.

The published accounts of Southern Cross show that in 2010, Southern Cross paid £248.3m in rent to the owners of the all properties in the UK. GMB estimated that the company paid an average rent per bed to landlords of £6,444 in 2010. 300 of the care homes are owned by the Qatari Investment Authority (QIA).( See contact details below for QIA media agency)

On 16th March the Prime Minister told MPs that he would ask the Minister of Health to urgently investigate the risks posed to the company by the unsustainable rent burden. It was later confirmed that Southern Cross was in talks with officials from the Department of Health and from the Department of Business Innovation and Skills. The talks are about maintaining proper standards of care for 31,000 elderly residents in 750 care homes as the company face severe financial difficulties due to sky high rents charged for buildings it uses as care homes. See copy of Ministers letter in Note 3 below.

When on 14th March 2011 Southern Cross said its current rent burden was unsustainable GMB expressed fears that elderly residents face the prospect of being made homeless as the company struggles to pay sky high rents on the freeholds of the buildings it uses as care homes.

GMB has staged demonstrations against the Qatari Investment Authority (QIA), which owns Harrods, over the failure of the QIA to cut the sky high rents charged on the Southern Cross care homes and the continuing tax avoidance on the income from these rents as the funds are channeled to off-shore tax havens. The public funds intended to pay for the care of the UK elderly in Southern Cross care homes are being used to pay the interest on £1,100m bonds raised by the QIA when they bought the care home buildings from a private equity company in 2006. See notes to editors for details.

There are 10,000 GMB members employed by Southern Cross to staff their care homes. The majority of these staff are paid the National Minimum Wage (NMW) and the majority have had their pay frozen.

Paul Kenny, GMB General Secretary said, "GMB has not been advised of closures of this magnitude at Southern Cross. We are aware that there are problems regarding the suitability of less than 10 care homes and we are aware that up to 50 homes could be handed back to their owners.

The situation at Southern Cross is very serious. GMB single-handedly has been telling the authorities and the landlords - particularly QIA the largest - that the way the funding spent on the care of the elderly is being used to pay inflated rents is unsustainable. GMB's warnings have been totally vindicated.

People playing politics, profits and interest rates with the welfare of 31,000 elderly and vulnerable residents who have served this country all their lives is totally out of order. It is a modern outrage made even worse as there are also 44,000 jobs at stake.

The 750 plus care homes run by Southern Cross are not factories that are failing from lack of demand but are an essential part of every community which now face ruin due to the combination of privatisation and private equity"

Notes

1 Text of report from Sunday Times

Southern Cross plans care homes closure programme

Helen Power

May 16 2011 12:01AM

Southern Cross plans to close up to 200 care homes as it seeks an investor willing to put up £100 million to save it from collapse.

The company, which looks after 31,000 elderly people in 750 homes across the country, has been crippled by a combination of public spending cuts and a rising rent bill that it cannot pay. Last week it asked landlords to slash rents by 30 per cent for the quarter from June.

Sources close to Southern Cross said yesterday that they believed sufficient landlords would back the plan, paving the way for a long-term restructuring deal. The 80 or so landlords, who include Royal Bank of Scotland and Lloyds Banking Group, are unlikely to pull the plug on a care homes business with thousands of elderly residents, but it has to be restructured.

Even if Southern Cross can hammer out a deal and raise fresh cash, it faces underlying operational problems. It needs to update its homes and boost occupancy rates, which have slumped from 91 per cent two years ago to 83 per cent, wiping out its profit margin.

The number of closures will depend on what deal Southern Cross can agree with its landlords, but it could get rid of between 100 and 200 homes, most of which probably would be taken over by a rival operator such as Four Seasons. It also wants to walk away from as many as 50 homes that it believes are unfit for use.

Southern Cross has hired the investment bank Greenhill to help it to find a new investor. The share price of the company, which was floated by the private equity group Blackstone, has plummeted from more than 400p in 2008 to only 10.6p on Friday. As well as selling a stake in the business, Southern Cross is offering new shares to landlords in return for reducing rents and releasing the company from some of its leasehold operations.

2 Statement from Southern Cross Thursday 12 May 2011

Southern Cross Healthcare Group PLC

('Southern Cross', 'the Company' or 'the Group')

Meeting with Landlords

Southern Cross, the UK's largest care home operator, announces that it has held a second group meeting with its landlords today as part of the ongoing financial restructuring of the business. The meeting was attended by landlords representing over 90% of its homes.

The Company put forward a request for a 4 month 'Summer Platform' to allow time to develop further its proposals in what is a complex situation. As part of the Summer Platform, landlords were asked to agree to a 4 month deferral of 30% of the current rent charge with effect from 1 June 2011.

Supported by NHP, the Company's largest landlord, and to be chaired by Daniel Smith of Grant Thornton, the other principal landlords agreed to form an official committee to act as an efficient conduit for the restructuring discussions and to ensure that negotiations continue to progress in a timely manner.

The Company also announces the appointment of Greenhill & Co., Inc., an independent investment banking firm, as joint financial advisor with KPMG, to assist the restructuring process.

Southern Cross reaffirmed that the provision of care remains the priority for all parties and that the negotiation process has not, and will not, compromise the quality of care it provides to its 31,000 residents.

Jamie Buchan, Chief Executive, commented:

"I would like to thank the landlords for attending today's meetings and for the time and commitment that they are giving to the process. These developments are a further step in a consensual and constructive process to create a sustainable future for the business.

"Throughout, Southern Cross remains fully committed to the provision of quality care to all of its residents."

3 Paul Burstow MP, Minister of State for Care Services at the Department of Health wrote on 22 March to John Spellar MP as follows; "Southern Cross is taking steps to restructure their finances. My officials and those at the Department for Business, Innovation and skills are talking to Southern Cross and KPMG, who are advising Southern Cross on delivering its restructuring plan. Officials are keeping a very close eye on the company and the steps it is taking. I will receive regular updates on progress.

"It is Southern Cross's responsibility to deliver on the plan they have for turning round their financial difficulties. We are being very clear with them that we look to them to maintain service continuity and quality of care while they do this. My principal concern is for the safety and well being of the residents of the care homes that might be affected.

We need to be very careful not to talk up a crisis. We are keeping in close touch with those who would have a responsibility to respond, and there are clear protections in place. Local authorities have a duty to protect the interests of the people they are responsible for in care homes. We are in communication with Association of Directors of Adult Social Services regarding their responsibilities and their contingency plans should the situation develop. The regulator (The Care Quality Commission) will have a role in ensuring that care is meeting the necessary standards and that quality is maintained. It will pay particular attention to care homes where there is a concern that quality may be inadequate".

4 GMB estimate that rents for the 752 Southern Cross care homes are £100m higher than they should be. QIA acquired the freehold in up to half of the homes in 2006 and are still the legal owner of them. In January 2010 GMB wrote to councilors on a number of councils to bring to their attention GMB's concern about high rents charged by the owners of buildings, including QIA. used as Southern Cross Care Homes and the lack of transparency regarding who owns the care homes and the financial returns to the ultimate owners of the properties.

There are 752 Southern Cross Care Homes in the UK with a total of 38,603 care beds for the elderly (September 2010).The published accounts for that period showed that in 2010,Southern Cross paid £248.3m in rent to the owners of the properties. GMB research indicates that up to half of the properties were acquired by a company called NHP, of which the ultimate parent company is Delta Commercial Property. This is a company owned by the Qatari Investment Authority and is registered in the Isle of Man. The financial returns for this company are consolidated within Libra No.2 Ltd, a company incorporated and registered in the Cayman Islands.

Southern Cross rents paid to the homes acquired by QIA in 2010 equated to £6,444 per bed. This was a 1.5% increase on the 2009 figure when the rent was £6,348 per bed which was a 4.9% increase on the 2008 figure of £6,050. This in turn was a 3.1% increase on the 2007 figure when the rent per bed was £5,866. This in turn was a 7.9% increase on the 2006 figure when the rent per bed was £5,435. Thus in the past 4 years rents have gone up by 18.6% at a time when property values were falling.

GMB have told the councilors that use Southern Cross to care for their clients, paid for with public money, that if the beds were used for different purposes the market clearing rents paid to the landlords would at least £100m less. If the accommodation was used for students, for example, GMB conclude that the total amount the landlords would receive is £121.8m.If the space were made available for private residential use, GMB consider that this would give rise to £139.5m in annual rental income.

5 Southern Cross- a financial history timeline

2004 Blackstone acquires Southern Cross from West Private Equity for £162m. It then bought NHP for £564m (£1.1bn including debt). NHP managed homes through its Highfield subsidiary, now owned by Southern Cross and at the time Southern Cross was one of its largest tenants.

2005 OFT investigated the NHP takeover by Blackstone believing it to be anti-competitive, particularly in Nottingham, Arbroath and Port Talbot. After an investigation OFT did not refer the case to the Competition Commission.

2006 Blackstone floated Southern Cross. NHP bought by Three Delta with funds provided by the Qatari Investment Authority (QIA) for £1.3bn. The £1.17bn debt NHP had was sold on to investors packaged as asset backed bonds and subordinated debt. QIA, through Three Delta, already owns The Senad Group, Four Seasons Health Care and Care Principles. It is the performance of these health care investors coupled with the failed Sainsbury bid which led to the split between the QIA and Paul Taylors Three Delta investment group.

2007 Blackstone sold remaining stake in Southern Cross. The 'buy and build' technique is understood to have netted a fourfold return for Blackstone.

2008 Southern Cross failed to pay back a £46m loan facility, unable to offload the properties attached to recent purchases. The banks agreed to a renegotiation but the company were likely to pay higher interest rates.

2009 NHP in negotiations over the restructuring of more than £1bn of loans that have been in default since November 2008. Its portfolio was worth £243m less than the loans secured on it.

GMB informed that owners of NHP are in negative equity and QIA have lost a lot on money on the transaction but are still the legal owners of the homes.

Three Delta big wigs: three non-executive Directors: Sir Peter Middleton, the former Chairman of Barclays Bank and Permanent Secretary at HM Treasury, Sir Christopher Howes, former Chief Executive of the Crown Estate, and Nick Land, former Chairman of Ernst & Young LLP. David Mellor, former Tory cabinet minister, was business development director of Three Delta. The current Business Development Director is Malcolm Le May. Delta Commercial Property is the name of the investment arm of Three Delta that acquired Four Seasons Health Care and the NHP portfolio. The results of NHP Ltd are consolidated within Libra no 2 Ltd, its immediate parent undertaking.

Qatari Investment Authority was established in 2000 with $40 billion. The fund does not report how much money it has invested or how much they have added to the fund. As a result, there is much debate on how much the fund actually has. There have been estimates of $50 billion and as high as $75 billion. Most likely it is around $60 billion. The QIA is controlled by Sheikh Hamad bin Jassim bin Jabr al Thani, the Prime Minister of Qatar. Due to the private nature of sovereign wealth funds and investment firms, there is a cloak of secrecy surrounding their activities and internal affairs, they are government owned and are not officially answerable to any international body and have no obligation to make any disclosures about the source of their funding. Most of the companies involved with Three Delta are Limited Liability Corporations and as a result, little and in some cases, no information is publicly available.

Qatari Investment Authority holds a 7.1% share in Barclays. They have recently taken a share in Porsche and currently own about 26% of Sainsbury.

Source:
GMB