In the economic sphere, emotion does not prevent good results. While the two main private groups providing accommodation for the elderly, Orpea and Korian, are in the middle of a media storm unprecedented since the publication of a book investigating alleged abuse, profits continue to fall. At the beginning of February, Orpea even exceeded all its forecasts, achieving more than 4.2 billion euros in turnover in 2021 (+9% over one year), i.e. 500 million more than the most optimistic scenarios formulated in the market by its financiers a year earlier.
As for its main competitor, Korian, it should also publish a sharp increase in turnover on February 23, if we are to believe the progress report established last summer. The company, which was also flirting with 4 billion euros in revenue last year, envisaged annual growth of 10% in July and a margin rate “higher than that of 2020”, i.e. more than 20%. Enough to make any financial director in Paris green with envy.
Payroll managed in real time
Only, for those who wish to know how Orpea and Korian – two leaders in Europe, far ahead of the competition – earn their living, it will still be necessary to wait. The groups are proactive in their financial communication when it comes to detailing the geographical locations, from Europe to Brazil. But no question of being more precise on the distribution of turnover, despite the requests of L’Express on this specific subject with the two entities.
“Orpea has never released the details of its revenues”, we plead on the side of the group’s communication. We just know that the French accommodation establishments for dependent elderly people (Ehpad) represent “less than 25% of the turnover” of the dean of private retirement homes – the group was created in 1989 -, which is has since diversified into clinics (Clinéa). At Korian, number 1 in the sector, “60% of turnover is used to pay salaries. It also covers purchases, infrastructure and allows taxes to be paid. shareholders”, explained Sophie Boissard, the general manager of Korian, on February 8 on the set of BFM TV.
The general manager of the Korian group, Sophie Boissard, during a press conference on December 7, 2021 in Paris.
afp.com/JULIEN DE ROSA
However, what the management of these listed groups do not detail is precisely part of the criticisms formulated by Victor Castanet in his book The Gravediggers. Beyond the alleged cases of mistreatment, the journalist also highlighted the extreme optimization of costs practiced by certain establishments. At Orpea, software would thus have made it possible to adapt the payroll in real time according to variations in occupation, by using fixed-term contracts or temporary work.
These groups would also use end-of-year discounts from their main suppliers to further boost their profitability. “Discounts are a fairly classic scheme. To sum up, we order 100 products, we pay them full price and if we order more, we receive them with a rebate of 15% to 20%, says a former senior executive. of a private establishment. Afterwards, it seems that the practice was very developed at the operator cited in the book [NDLR : le groupe Orpea].”
“The more people are dependent, the more lucrative it is”
This stringent management is not insignificant. It is precisely one of the engines of the stock market performance of these groups. The other buoyant factor is based on the sector’s double-digit growth prospects, with the aging of the population. In a note intended to attract new investors, Korian thus recalled, in February 2020, that the share of the European population over 80, its core target, should experience an increase of “30% between 2015 and 2030”. As for the dependency ratio of octogenarian Europeans, it would rise from “29% to 39%” over the same period. Until the scandal, the “silver economy” (“the senior citizens’ economy”) was therefore an excellent investment for the future.
“These are real cash machines, with an economic model that is quite complicated to monitor. A third of the income comes from the public authorities and the Health Insurance. But where these groups earn a lot of money, it is on the ‘hotels and restaurants”, confirms the economist Frédéric Bizard, specialist in health issues. With free tariffs, this part weighs more than 13 billion euros in cumulative turnover, i.e. almost double the “care” part paid by the regional health agencies, and almost four times more than the “dependency” part. “Funded by the departments.
Public funding which is as much guaranteed revenue. “The entire budget is built a priori. The allocations are calculated in relation to the previous year, according to the occupancy rates, which is why it is necessary to avoid going below the thresholds. The cynicism of this business is that more the people are dependent, the more lucrative it is for the operator”, adds a former private sector manager who worked in the voluntary sector. And a penny is a penny.
In 2020, despite its excellent financial results, Korian received 95.7 million euros in compensation from the French, German and Belgian States “for the loss of activity”, since during this first epidemic wave, ” revenues were lower than the normative amount set by decrees depending on the country”, explains the group in its 2020 annual report. “At the same time, the States need these operators, because they provide a great service to the community. They must therefore also spare them”, justifies a wise observer.
Up to 10,000 euros per month
And yet, if there are around 500,000 residents in Ehpad – public, private and associative combined -, “200,000 people have nothing to do in these establishments”. “France does not leave its binary home-Ehpad model, when it would take a complementary, hybrid and more individualized offer”, pleads the economist Frédéric Bizard, who regrets the lack of anticipation of the public authorities on the subject. Residents generally stay between eighteen and twenty-four months in urban establishments in which families pay an average of 2,000 euros per month, according to the National Solidarity Fund for Autonomy. But for the 125,000 residents of the private sector, the bill can soar up to 10,000 euros per month: this is the case in certain chic establishments in western Paris.
The new Chairman and CEO of Orpea, Philippe Charrier, before the Social Affairs Committee at the National Assembly, February 2, 2022.
afp.com/Alain JOCARD
As a result, and by nature, the activity of senior residences is therefore very correlated with real estate. Orpea invests on average more than 500 million euros per year in buildings, which means that its real estate portfolio today displays an overall value of 6.8 billion euros (+789 million euros in 2020). A heritage that has tripled in ten years!
“These groups have taken full advantage of the tax exemption mechanisms. For the developers, the rents are guaranteed, the yields show more than 4% per year and the amortization is rapid. This is how these groups have formed stone empires in a few years”, confides a former senior executive of a private group. These properties also make it possible to cushion the effects of the health crisis: Orpea sold more than 230 million euros in real estate assets in 2020, a practice that had been little developed in the group until then. This portfolio will also be vital to get through the reputational crisis, because these assets could well cover the groups, while the shares of Korian and Orpea have been massacred for a month.
“A dark scenario” in perspective
On the stock market, the effects of the media storm were immediate. Since the release of Victor Castanet’s book, the Orpea title has lost 60% of its value, bringing the capitalization down to 2.3 billion euros. The action is only worth 35 euros when it was familiar, just before the outbreak of the health crisis, the bar of 120 euros!
For Korian, collateral victim of the scandal, the fall is “only” 40%, but the effects are also likely to be lasting. “The new uncertainty for the sector, following the recent allegations, is linked, not to growth, but to possible stricter regulations in the future. There is clearly a risk that profitability will be lower than what it was. We are talking about a ‘zone of depression’, even a ‘dark scenario'”, explains Michel Keush, manager at Bellevue Asset Management, a fund based in Zurich.
“The sector has always been the subject of reports in the press or on TV, but never has an investigation been so thorough. The amplifying effect is that funds with social commitments [NDLR : les pratiques liées à l’environnement, aux questions sociales et à la gouvernance (ESG)] quickly sold their positions. It reminds me of Dieselgate, where the fall had been brutal. The market does not question the activity of private nursing homes, but the governance of groups”, explains Stephan Dubosq, financial analyst at Kirao and specialist in the medical sector.
For Orpea as for Korian, the period of uncertainty is therefore likely to be very long, because any regulatory changes will also depend on the outcome of the presidential election. In the meantime, their shareholders are already beginning to put pressure on management, like Mirova, the third shareholder of Orpea, who has asked for a change of status to a “mission-based company”. A vote should take place at the next board meeting, scheduled for the spring.
In the meantime, this instability is the honey of powerful investment funds which take advantage of it to take a position. This is particularly the case of the giant BlackRock which has just passed the 5% threshold at Korian. “BlackRock is not coming to overturn the table but has collected securities from other funds which have, in a way, lent it while waiting to make strategic decisions”, explains Stephan Dubosq. Not only will Orpea and Korian have to restore confidence with the public and the authorities, but it will also have to give meaning to investors. Remission is not for tomorrow.