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Southern Cross on the back foot after pounds 8.6m loss; HEALTHCARE.

Byline: By Duncan Tift Business Staff

Britain's biggest care home operator Southern Cross Healthcare, which has scores of properties across the West Midlands, reported pre-tax losses widening to pounds 8.6 million from pounds 600,000 in the first half, as sales rose 28.2 per cent to pounds 431.2 million, slightly below forecasts of pounds 436 million.

The company said it was also changing growth strategies from one of acquisition to development to reflect the relatively poor state of homes on the market and the fact that the credit crunch had made them more expensive.

Finance chief Jason Lock said the pre-tax figure was affected by a book charge relating to future minimum rent increases.

"The major factor is this charge for future minimum rental increases, which is just an accounting adjustment that we have to put in our accounts for the fixed escalators that are in our leases, it's just a book entry it's not a cash charge," he said.

The company said fee increases were ahead of its expectations for the half, with underlying average weekly fees up six per cent to pounds 515.

While it is still in negotiations with some local authorities over fee increases, chief executive Bill Colvin said he believed it would end up around five per cent but that he hoped it would be more.

"We've had offers from about 85 per cent of the local authorities, a number of those we've accepted a number we're not accepting - five per cent is where we think the number's going to be at the least, I'm hoping that we can do better than that.

"England's coming in somewhere round about 3.8 per cent," he said.

Southern Cross said the number of beds increased by 14.4 per cent in the first half to 37,084, rising 869 excluding the managed home agreement with Bondcare.

Mr Colvin reiterated the company's target of 3,000 beds a year.

He said the credit crunch had cut the amount of cash that the company could afford to pay, and the fact that there are not so many good quality acquisitions available meant that it was shifting to a mostly development strategy.

The new focus will see the 98 per cent acquisition growth strategy change to two thirds development and one-third acquisitions.

"If a larger deal comes along we'll certainly be going for it aggressively, but you've got to remember that a lot of the deals we look at are homes that we just don't want to own because of the poor quality, which is why we've moved to a development strategy, it's not because we like building nursing homes it's because the quality of acquisition targets has got poorer."

In outlook, the company said: "The fundamentals of our industry in the UK remain positive.

"A rapidly ageing population is increasing demand for quality care services and there is a continued shortage of high quality purpose built homes, as smaller, non-compliant homes continue to exit the market."

Due to this, Mr Colvin said he remained confident that fees would continue to increase at least in line with costs.

"We think revenue growth is probably in the low to mid teens and I think that'll come through to EPS and income growth in the low to mid teens as well," he said.

The company restated its interim dividend by 50 per cent to 3.75p.

"You've got to remember that a lot of the deals we look at are homes that we just don't want to own because of the poor quality Bill Colvin
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Title Annotation:Business
Publication:The Birmingham Post (England)
Date:May 13, 2008
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