In response to our special documentary charting the rise and fall of Southern Cross none of the former top level executives we feature agreed to be interviewed.
Their responses are featured in our programme but for the record here are their fuller statements:
Philip Scott - Former Chief Executive.
Statement via spokesman:
Mr Scott is a trained nurse who maintains his professional registration. His leadership of Southern Cross plc always put patients first. At his departure group occupancy was over 90%, and company had achieved its operating budget target for 2007. This would not have been possible if residents and their families did not think the business had the right ethos.
The so-called sale & leaseback model was not initiated by Mr Scott and is common in UK business. Many businesses, whose core activity is not property, rent their premises. Southern Cross got into difficulties because Mr Scott's successors could not pay the rent. Being unable to pay rent is a symptom of business failure not the cause of it. The real problem was low occupancy and escalating central costs which combined outstripped the increases in rent by many millions.
Since 2008 the loss of revenue due to lower occupancy was £54m and the increase in central operating costs was £7.5m. These figures are more than double the increase in rent in the same period. Dealing with the occupancy and central costs would have radically changed the company's position.
Fortunately, other companies have been willing to rent and run Southern Cross homes and the situation has not resulted in wholesale home closures. Southern Cross shareholders have been the ultimate losers, not the residents. The new structure, which is now working, could have been achieved without the publicity and rancour which upset families and damaged the reputation of the sector.
Mr Scott's shares were sold as a direct result of the then Labour Government's change to capital gains tax. Hundreds of directors in different business throughout the UK also sold shares at the same time. He re-bought shares at a later date and lost money when Southern Cross collapsed. He is also minority shareholder in companies that own five former Southern Cross homes. He effectively re-invested in Southern Cross by providing funds that allowed these homes to be built. He has no say in how those homes operate.
Graham Sizer- former Financial Director
Mr Sizer responded to our written questions point by point.
On Sale & Leaseback:
Sale and leaseback or direct leasing is a common form of property finance used by businesses and has been widely used in healthcare. Each time we entered into a lease, the rent was set at a sustainable level having regard to current occupancy, payroll costs, direct and indirect costs, with an allowance made for capital expenditure required at the home and a contribution towards the central office overhead.
The group accounts... (show) ...the measure rent cover which demonstrates this (sic).
However, like any other business, if revenue falls, in Southern Cross' case because of falling occupancy, then the business will come under pressure....
...With falling occupancy it wouldn't have mattered which financing model was used. If the company had used bank finance the interest and capital repayments would have been a proxy for rent. Also given the economic downturn post September 2008 the business would have faced severe refinancing risk on a bank borrowing model.
I would also point out that the leasing model was fully explained and disclosed to investors at IPO and was embraced by the investment community as a simple credible model for the business.
The falling occupancy was a product of care standards and reputation. You should look at the number of admissions embargoes that were in place over the past few years. I believe these were disclosed in annual reports and public announcements.
On Care standards and the inspectors' reports:
Service to residents was the primary concern of management. Without that there was no business. I believe that occupancy rates clearly show how the company was viewed by commissioners and regulators. Commissioners will not place residents where there is a concern about the quality of service.
You are correct that the company expanded during that period and it would therefore be prudent to see when these reports were dated. When we acquired groups of homes, we did sometimes acquire homes that did not meet the standards, however these were either invested in or sold on.
I don't deny there would have been care issues at some homes. There will always be issues in this type of business. It is how you try to pre-empt those issues through training, policy and procedure and how you react in the event that these were not followed. We used to work to the ethic "you are only as good as your worst employee". Continual training and improvement are therefore extremely important.
On too few managers:
Each home is required by regulation to have a Registered Manager. There will sometimes be periods when positions are vacant, however we used to employee around 25 to 30 project/ relief managers to cover homes when there were vacancies. I obviously can't say if this continued after I left in January 2008.
On :
I would merely point out that there have been many reviews of Long Term Care strategy and funding over the past decade, mostly whilst Mr Milliband's party were in government. On each occasion those recommendations were shelved as being too costly.
Care home operators generally provide a good quality service at an extremely efficient cost to the NHS and Local Authorities. However, most commentators would agree that the system is underfunded and we will see more and more operators failing.
It is interesting that the Labour government found the billions necessary to bail out the banks, but then line up to take a cheap shot at the private equity industry.
They should perhaps take a closer look at their own PFI hospital projects.
In the case of Southern Cross, private equity did make good returns, but this was due to the buoyant property market at the time. No funds were taken out of the business as has been widely reported. Private equity owners left the business in a sound financial position when it was floated on the stock market.
On the sale of his shares:
The timing of management's share sale was driven by government changes to capital gains tax rules. Most of the management team had been with the business since 2000 and had rolled their interests each time the business was sold or refinanced.
Having taken advice from our brokers it was agreed that December 2007 was the correct time to sell, having just announced our 2007 results to the market. The shares were placed by our brokers to a number of financial institutions.
I still own 300,000 shares today.
Since leaving I have invested a significant sum in a development company that has developed a number of new purpose built care home facilities. 3 of these were built specifically for Southern Cross and leased to them. I would not have done so had I foreseen any issues with the company.
...the Chairman's statement in the 2008 annual report.... is quite explicit about how the company weathered some issues in that year and how it was well set for the future following September 2008.
BLACKSTONE - former owners
Statement:
Blackstone has not controlled Southern Cross since its flotation five years ago in July 2006. Blackstone did not "asset strip" the company. In fact, when Blackstone acquired Southern Cross, Ashbourne Care and Highfield Care, 95% of the group's homes already operated under leases that existed before our investment. Blackstone did not profit from "stripping" assets but invested in and built a company that was viewed by the market as an industry leader: a high quality operator with a solid future. At the time of its flotation, Southern Cross was conservatively capitalised and able to withstand future financial pressure. The company's demise occurred many years later under public-company ownership due to a combination of significant occupancy declines (from over 90% at the time of its flotation to less than 85% today) and lower fee rates as a result of an unprecedented decline in funding to the sector. It is simply inaccurate to claim that lack of property ownership was the cause of the company's failure.
During Blackstone's ownership, Southern Cross was acutely focused on quality of care issues: any issues were immediately identified and rectified as quickly as possible without regard to cost - the board of the company monitored these issues continually - and the Company's success and Blackstone's investment turned on the reputation and perception of the company as a sector leader. Under our ownership, management capability was invested in with the hiring of a new Chief Operating Officer under the Chief Executive and an increase in the number of area managers. At the time of the company's successful flotation in 2006, it was well regarded by its customers and its regulator, and there were no systemic quality of care issues.
William Colvin - Former Chairman and Chief Executive
No response received
John Murphy - former Group Operations Director
No comment
Hi, I'm Chris Jackson - presenter of the North East & Cumbria's very own current affairs programme, Inside Out. Welcome to my blog where I'll reveal some behind-the-scenes goings-on and share my thoughts on the stories we cover.
