Mastercard CEO Ajay Banga to step down, insider Miebach tapped By Reuters

© Reuters. Mastercard President and CEO Banga speaks to attendees during the Department of Homeland Security’s Cybersecurity Summit in Manhattan, New York

(Reuters) – Mastercard’s chief executive officer of 10 years, Ajay Banga, will step down at the start of the next year, the company said on Tuesday, and be replaced by Chief Product Officer Michael Miebach.

Banga, who took charge of the company just after the 2008-09 financial crisis, has seen the payment processor’s revenue triple during his tenure as online shopping gained prominence around the world.

India-born Banga will take on the role of executive chairman, while Miebach will become the company’s president on March 1.

Chairman Richard Haythornthwaite will retire after more than a decade when Banga assumes his new role, the company said in a statement.

Before joining Mastercard (NYSE:) as president of Middle East and Africa in 2010, Miebach served as managing director at Barclays (LON:) Bank and general manager at Citibank.

In connection with Miebach’s appointment as president, Mastercard has entered into a new compensation agreement that adds $750,000 to his annual base salary, the payment processor said in a filing.

Miebach will also receive an equity grant with a target value of $6.25 million.

His compensation as chief executive officer will be determined later, the company added.

Mastercard on Monday warned its first-quarter net revenue would take a hit if coronavirus outbreak persists through the quarter.

Shares of the company were down nearly 2% at $319 in the premarket trade.

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SailPoint Technologies Holdings’ (SAIL) CEO Mark McClain on Q4 2019 Results – Earnings Call Transcript

SailPoint Technologies Holdings, Inc. (NYSE:SAIL) Q4 2019 Earnings Conference Call February 24, 2020 5:00 PM ET

Company Participants

Josh Harding – Vice President-Financial Planning, Analysis and Investor Relations

Mark McClain – Chief Executive Officer and Co-Founder

Jason Ream – Chief Financial Officer

Conference Call Participants

Melissa Franchi – Morgan Stanley

Matt Swanson – RBC Capital Markets

Andrew Nowinski – D.A. Davidson

Yun Kim – Rosenblatt Securities


Greetings and welcome to SailPoint Technologies Holdings Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Josh Harding, Vice President of Financial Planning, Analysis and Investor Relations. Thank you. You may begin.

Josh Harding

Thank you. Good afternoon and thank you for joining us today to discuss SailPoint’s fourth quarter and full year 2019 financial results. Joining me today are SailPoint’s CEO and Co-Founder, Mark McClain; and our Chief Financial Officer, Jason Ream.

Please note, today’s call will include forward-looking statements, and because these statements are based on the company’s current intent, expectations and projections, they are not guarantees of future performance, and a variety of factors could cause actual results to differ materially. Since this call will include references to non-GAAP results, which excludes special items, please reference this afternoon’s press release in the Investors section of for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results.

And now I’d like to turn the call over to Mark McClain.

Mark McClain

Thanks, Josh and good afternoon. Thank you for joining the call today. I’m pleased to share our results from the fourth quarter of 2019 where we delivered $89 million of total revenue ahead of our guidance, driven by continued market demand for identity governance, our laser focus on innovation and solid execution by the SailPoint team.

I’d like to spend a few moments adding some color around these results. Looking back at the year we just completed, we believe our success was fueled by our long track record of innovation in the identity market. In 2019, we delivered innovation across three areas of our business. First, we redefined the direction of the industry with the unveiling of our AI and ML enabled identity platform, SailPoint Predictive Identity.

With SailPoint Predictive Identity, which can be leveraged by both our SaaS and on-premise customers, we are evolving identity governance to be more automated, adaptive and predictive. This speed’s important identity decisions, freeing up IT and identity teams to focus on the areas of greatest risks to the business. It also introduces a simpler way of doing identity, inviting a more productive, efficient and secure workforce. This new way of doing identity ensures that everyone and everything, whether that’s employees, contractors, partners and even non-human entities has exactly what they need exactly when they need it seamlessly and automatically.

Second, we expanded the scope of our core SaaS identity governance platform to more comprehensively address the complex enterprise use cases we see among customers around the world. In fact, we’re beginning to see more companies who had traditionally leaned towards an on-premise identity platform now leaning more and more towards SaaS. As an example from last year, one of the world’s largest multinational mass media and entertainment organizations opted for our SaaS identity platform IdentityNow to form the foundation of their identity program. This customer was drawn to the functionality available out of the box and the ongoing operational benefits of a SaaS-based approach to identity governance, having spent years running CA’s cumbersome and highly complex on-premise solution.

Third, with the acquisitions of both Orkus and Overwatch.ID, we are delivering deeper governance for all cloud applications and infrastructures. This is increasingly important as the majority of today’s digital businesses have been built on cloud infrastructure. The need for fine-grained governance over who has access and how that access is being used across this cloud environment has never been more critical.

Now let’s shift gears to our 2020 focus. The SailPoint team remains wholly committed to driving the identity market forward both from a visionary and leadership standpoint. I’d like to spend a few minutes discussing our product strategy going forward and our vision for identity in the year ahead.

In 2020, we expect an increasing number of the enterprises we target to lean towards SaaS for all aspects of their identity program. To address this shift, our product strategy is two-fold; accelerate innovation, delivering on our vision for SailPoint Predictive Identity. We intend to deliver these and other new capabilities through our SaaS platform. These innovations while delivered as SaaS will interoperate with both our IdentityIQ software platform as well as our IdentityNow SaaS platform. As a result, all of our customers new and existing, whether on-premise or cloud only will have access to the full benefit of SailPoint Predictive Identity.

This SaaS-driven approach will further accelerate our pace of innovation, while continuing to support all of our customers’ hybrid environment and ensure that they are all able to build a next-generation identity program with SailPoint. While we believe that an increasing number of enterprises will start to lean towards our SaaS solution, we fully acknowledged that some enterprises will still prefer to run a software-based identity program for the foreseeable future. We’ll remain focused on making our new SaaS offerings easily consumable by these customers with on-prem deployment.

As an example, a large multinational energy transportation company we worked with this past quarter is now leveraging SailPoint Predictive Identity services within their existing IdentityIQ based program. This customer was excited about the ability to extend their on-premises identity program to take advantage of our recently launched SaaS capability. Moving forward, we remain committed to fundamentally evolve the identity landscape with SailPoint Predictive Identity. We believe the market is ready for a new approach to identity one that we drove last year with the initial introduction of the solution. Since then, we’ve made this vision a reality for our customers by extending beyond the initial functionality we brought to market.

For example, we just introduced a new patented access modeling service that makes it easier for customers to both create and update role models dynamically as their organization changes. This coupled with the patented recommendations engine and access insights services, which are already available delivers an intuitive and adaptive approach to identity. The early interest and response from customers has been strong. For example, one of our customers, a large retail propane distributor recently extended their investment in SailPoint fully recognizing the value of AI to their existing IdentityNow SaaS-based identity program. With SailPoint Predictive Identity, they now have clear visibility into user access and anomalous access privileges across their entire population of users. And can now take action on risky access privileges that previously were not apparent.

In closing, we are in a solid position as both the industry leader and visionary in identity governance as evidenced by our extended leadership in the Gartner Magic Quadrant for identity governance and administration. We have the domain expertise coupled with strong business fundamentals in place to continue to deliver the most comprehensive approach to identity. As in past years, we will continue to execute in a way that benefits our customers around the world and deliver innovative identity solutions that address our customer’s digital transformation need.

Now, let me hand it off to Jason, who will discuss our financials for the quarter and the year.

Jason Ream

Thank you, Mark and thank you to everyone on the line for joining us today. As Mark noted earlier, we saw a number of positive trends in the fourth quarter and are pleased to have exceeded our guidance on both the top and bottom line. Total revenue for the fourth quarter was $89 million, an increase of 10% over Q4 of 2018. Subscription revenue increased 37% year-over-year to $40.5 million and represented 45% of total revenue for the quarter.

If you will recall, in the third quarter subscription was just under half of our total revenue at 49%. In Q4, some large license deals at the end of the year moved that percentage down despite higher year-over-year growth in subscription this quarter. We expect that this maybe one of the last time that subscription is less than half of our total revenue. Renewal rates remain consistent with historical trends, which we believe to be attractive relative to industry norms.

License revenue of $38 million was down 6% year-over-year, but up 42% compared to prior quarter and ahead of the expectations that were built into our guidance. The better than expected license performance was driven by strong execution across all three geographies.

As I transitioned to the remainder of our income statement, I want to note upfront that unless otherwise stated, all references to expenses and operating results are calculated on a non-GAAP basis and exclude the items outlined in the GAAP to non-GAAP reconciliations provided in today’s press release.

On a combined basis, total gross margin for the quarter was 83%, compared with 84% in Q4 of 2018. Gross margins for each of our revenue streams continue to improve independently, but the overall gross margin change reflects the continued mix shift towards SaaS revenue versus the year ago period.

Operating expenses for the quarter were $58.2 million. This is up 15% sequentially from $51.7 million in Q3, primarily driven by an increase in sales commissions in our seasonally largest quarter of the year, by corporate bonus accruals based on our operating income outperformance and due to the addition of the two acquisitions that we made in October.

On a year-over-year basis, operating expenses up 21% from $49.5 million, and we ended the quarter with 1,168 employees, a 4% increase during the quarter itself, and up 16% from the end of 2018. For the full year of 2019, total revenue was $288.5 million, an increase of 16% over 2018. License revenue was $102.8 million and services revenue was $42.3 million. Subscription revenue was $143.4 million or 50% of total revenue and up 38% year-over-year.

As we look forward to 2020 and beyond, I want to lay out a few of the beliefs shared by our management team as we look at the business. First, we were very excited about our market opportunity. We believe that identity is the key to securing the enterprise as it moves to the cloud and the governance is the critical piece in managing identity. We are the market leader in identity governance and are best positioned to capitalize on this growing opportunity.

Second, we believe that we are well positioned to execute on this opportunity. The additions that we have made to our team and the tuning we have done to our operating model put us in an excellent position to accelerate our business. Notably, we have seen meaningful improvement in pipeline, quality and growth over the last several quarters.

Third, we are seeing the market shift towards cloud and SaaS and believe that as a shift we are ready to address. Most importantly, it serves as an opportunity to accelerate our market penetration and our competitive advantage. We felt an increasing level of pull towards SaaS by the market and believe that 2020 is the right time for us to lean in.

And lastly, through our Predictive Identity vision, we believe we can change the game for enterprise customers. Meaningfully, improve their security and compliance posture and dramatically simplify management of the identity program. We believe that Predictive Identity will further differentiate us in the market, bolstering our competitive position and will enable us to increase the rate at which we can capture market share. As such, we intend to continue to invest in our ability to deliver this vision more comprehensively and efficiently through our SaaS platform.

Based on these beliefs, our plan for 2020 aligns with the following core tenant. We expect that our bookings growth will accelerate from 2019 growth rates, driven by a strong market and the better execution we’re seeing across the business. We believe our bookings mix will accelerate its shift towards SaaS over the course of the year, and expect that a majority of new customer bookings will be SaaS by the second half of 2020. And we intend to accelerate investments in our products with the majority of our investments focused on our SaaS platform and on expanding the capabilities of Predictive Identity.

Our current expectations for 2020 are as follow, revenue in the range of $320 million to $325 million, representing 11% to 13% total revenue growth over 2019, while we expect a higher bookings growth rates in 2020 than 2019, the accelerating shift towards SaaS has a dampening effect on recognized revenue. If we were to execute our 2020 bookings plan at the same license, subscription mix as 2019, we would have expected revenue growth of approximately 18% to 20%.

Subscription revenue will continue to be our fastest growing revenue stream and should be more than half of our revenue throughout 2020. For the full year, we expect subscription revenue to be approximately 57% to 58% of total revenue, up from 50% in 2019. That represents a year-over-year growth rate of approximately 28% to 30%. Subscription revenue includes both maintenance and SaaS, but SaaS is rapidly becoming a larger portion of that revenue stream.

We expect license revenues be down from 2019 by approximately 5% to 8%. We expect to continue to sell perpetual licenses to existing customers that wish to expand their deployment and a certain large enterprise customers that want an on-premise deployment or needs specific functionality that is currently only in our on-prem product. However, we expect the majority of our new customer sales will be SaaS by the second half of this year and beyond. Lastly, we expect our services revenue to be approximately $41 million or approximately flat with 2019.

On expenses, we are growing our investment primarily focused in two areas. On the product side, we are investing our SaaS governance platform, which we believe is already the leading SaaS identity governance product to bring it to a level, where it’s capable of solving the majority of the complex use cases of any enterprise customer in the world. Additionally, the two acquisitions that we made last fall, which together represented $2 million $2.5 million of incremental operating expense in the fourth quarter of 2019, we’ll continue to be a net investment in 2020. We have seen significant demand for those capabilities, but obviously don’t expect meaningful revenue contribution from those products in 2020 itself.

And finally, we expect to significantly grow our sales capacity in 2020, doubling down on the execution strengths that we have seen in the team and based on the confidence that we have in the market opportunity. Taking together our outlook for recognized revenue, which is dampened by the accelerating shift to SaaS and our investment plan, which includes a full year of the two acquisitions we made late last year, as well as the proactive push to ramp our sales capacity and to bolster our SaaS capabilities.

We expect total non-GAAP expense approximately in line with total revenue, or in other words, breakeven non-GAAP operating income for the year. As referenced earlier, the mixed shift we’re expecting this year reduces expected revenue growth by roughly seven percentage points or roughly $20 million. Given the nearly 100% gross margins on licensed revenue, almost all of that revenue would have been expected to fall to the bottom line.

Turning the first quarter of 2020, we expect total revenue of $71 million to $72 million, representing 17% to 19% growth over the first quarter of 2019. Subscription revenue should be approximately 60% of total revenue, representing roughly 36% growth year-over-year. In addition, we expect the non-GAAP operating loss of $4.5 million to $3.5 million, due to the accelerated rate of investment referenced earlier.

With that, we’ll open up the call for question. Operator?

Question-and-Answer Session


Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Melissa Franchi with Morgan Stanley. Please state with your question.

Melissa Franchi

Okay. Thanks for taking my question. I wanted to start maybe on the topic of sales execution. So the new Chief Revenue Officer, Matt Mills has been on board I think for about two quarters now. So can you talk about the changes that he’s been able to make to the sales organization, what you’re seeing in terms of sales productivity this quarter? And what is still getting worked on for 2020?

Mark McClain

Hi. Thanks, Melissa, its Mark. In general, I’d say largely unchanged. I think Matt felt like he inherited a machine that was up and running pretty well. He certainly fine tuning some of our processes, thinking about how to build in better scaling capabilities and everything from how we onboard and enable our team. How we work through our selling processes and how we worked through our contracting processes. But I think his assessment would be that this was a pretty well running machine, but it can certainly be tuned up and getting it better. I think a lot of his focus in this first part of 2020 is really to build the team and get the capacity up early in the year to capitalize on the opportunity we see in front of us.

Melissa Franchi

Okay, that’s helpful. And then on the kind of leaning more heavily into the SaaS side is the business. How are you doing that exactly? Is it more customer-driven? Or you just anticipate customers are more willing to buy SaaS? Are you making any changes to the sales force to incent them to sell that?

Jason Ream

Yes, Melissa. Look, it’s a little bit of everything. As you know, we’ve been transitioning somewhat over the past several years, right? SaaS has become an increasingly larger part of our business, we’re getting a lot of pull from the market. And that is, I think customers all over and in almost every industry vertical have been looking at SaaS for long time. And maybe security was a little bit further behind in some places, because some customers felt like they had to have that on-prem.

We’re seeing a lot of acceptance now of something even as mission critical as Identity Governance, being a SaaS delivered product and in fact, proactive interest in that direction. You combine that with the fact that our product, which we launched I think, 5.5 years ago at first, obviously that was not ready to serve the majority of the market. Today, it can serve, really customers of almost any size.

Mark referenced one example of a huge multi-national corporation with our SaaS product in Q4, work to the point or close to the point, now we’re just about any customer in the market could use our product. A couple of use cases here and there, that are only on the on-prem product, but that’s part of the investment we’re making on the R&D side in 2020, to where it can serve any customer in the market. You put all that together and that’s what the leading to our beliefs about what’s going to happen in 2020.

I think we have, as Mark referenced in his part of the script, our approach here is it’s not a 180 degree pivot. One, we think there are some customers, who will continue to want the on-prem version or just want an on-prem deployment and we’ll still serve that demand. And second, obviously we’ve got on-prem customers, existing customers who continue to buy more from us. And so that will be part of our business for some period of time to come.

Melissa Franchi

Thanks, Jason. Thank you.


Our next question comes from the line of Matt Hedberg with RBC Capital Markets. Please state your question.

Matt Swanson

Yes, thanks. This is actually Matt Swanson on for Matt. Mark, you did a great job explaining kind of the competitive differentiation of the Predictive Identity platform, but could you dive a little bit deeper on how this could help you expand within your existing customers. Just in terms of the number of identities that your customers can manage, especially when we start thinking more about adding bots into the equation?

Mark McClain

Yes, great question, Matt. We always count on some Matt dialing in from RBC. How’s that? Look, I think a couple of ways I would say that this is going to help us with our existing install bases, right? What we hear continually from customers is there’s a lot of challenge getting their arms around the scope and complexity of their environment. And at the end of the day, part of the challenge is just understanding where they should spend their time and energy and focus. Part of what we’re delivering with Predictive Identity is helping them automate and streamline a lot of the relatively repetitive road parts of identity governance of which there’s a lot. So that they can focus on the real risk and security concerns that the organization has.

And as you pointed out, Matt, part one of the newer risks that’s emerged is the concern over software bots or robotic software processes, where more and more work is being driven into an automated software program to take the load off of people. But those programs, those bots behave very much like a human in regards to systems and applications. And so customers are absolutely expecting a product like SailPoint to help them govern who and what in that case has access to those questions or to those issues. And therefore we can kind of work our way through it with the Predictive.

And in general, I think the scaling up, like as we’ve said many times, sometimes customers will license from their entire enterprise. But quite often a large enterprise will license for something less than that, maybe a geographic region, maybe a division. And so the speed with which we can help them deploy and rollout the solution in their enterprise, which we believe Predictive Identity will accelerate, that will help them get to more identities under governance sooner. So that will certainly be an assistant helping us drive more product capabilities into these customers.

Matt Swanson

That’s really helpful. And then since the SaaS portion has been growing, I think something that we’ve thought about some is how to think about balancing the investments in IdentityIQ versus IdentityNow. Could you just talk about how something like Predictive Identity that can be leveraged by both platforms maybe can bridge that gap from an R&D investment capabilities?

Jason Ream

Yes, absolutely. This is Jason. That is the core of our strategy there is that as we build out significant new capabilities, we’re building that amount out in SaaS. But in a way that it can be leveraged by both, existing on-prem customers as well as existing SaaS customers and future customers of either side really. Obviously, there’s some work that we need to do in the on-prem product to be able to make it work with those capabilities, but that’s relatively minimal.

And we still have some ongoing investment we need to make into the – to the on-prem product to keep it current and keep existing deployments functional with new minor releases. So I think the right way to think about it is that we’re making the necessary investments in the on-prem side, and most of the forward-leaning, forward-looking and speculative investments are more on the SaaS side, whether that’s in the SaaS governance platform or in the additional modules. So to speak, that would work with both on-prem and SaaS.

Matt Swanson

Thanks. That’s really helpful.


[Operator Instructions] Our next question comes from the line of Andrew Nowinski with D.A. Davidson. Please state your question.

Andrew Nowinski

Great. Thank you, and congrats on the good quarter relative to your guidance. I guess, I just had another follow-up question sort on the SaaS investments you’re making. So you said all customers will have access to the full benefits of Predictive Identity. I guess is that the same as saying that IdentityIQ and IdentityNow will be add feature parity by the end of 2020. What customers will get the same functionality regardless of the form factor they deployed?

Mark McClain

Andy, it’s Mark. I wouldn’t – we’ve always avoided saying full parity because the truth is when we built IdentityNow, we intentionally took some different approaches to how we thought customers would want to do things in a SaaS centric environment. And so we tend to talk about use case coverage rather than feature parity to say we’re – our goal is to make sure we cover the use cases our customers think are relevant and increasingly as Jason said earlier, we believe our IdentityNow SaaS platform will cover the bulk of requirements for the bulk of the customers we serve.

I think there’s still going to be a number of cases, incredibly large complex global organizations for whom some of them IdentityIQ will still be the right fit. But what we mean by that is saying, whatever we deliver in Predictive and that’s going to be encompassed in things like the IdentityAI platform. We’d already launched some of the new services, we’re adding to that. We just announced access modeling last week that we’ll be delivering more capabilities to the technology we acquired through Orkus and OverWatch.

All of those capabilities will be delivered as SaaS services that will ensure that a customer, whether running IdentityNow or IdentityIQ we’ll be able to leverage all of that new functionality. And as Jason said, sometimes that involves us making some changes in those core platforms to make sure that’s true. And that’s the ongoing commitment of investment we’re making in both those existing platforms is that everything new that we do should be leverageable by both platforms.

Andrew Nowinski

Okay. That makes sense. And then maybe just a clarification. As it relates to your 2020 outlook, can you give us any color in terms of how much contribution from Orkus and OverWatch you added that outlook? Just trying to understand sort of the organic growth rate versus the contribution from the acquisitions. Thank you.

Jason Ream

Andy, it’s almost 100% organic. Those products – one our SaaS, so the recognized revenue effect in 2020 would be pretty minimal. But they’re really launching actually this quarter. And so, the sales team knows about them and the market knows about them and there’s a lot of excitement out there. But we don’t really have formal pipeline built yet. So I’m sure, we’ll sell some this year. But I don’t expect really revenue contribution.

Andrew Nowinski

Wonderful. Thanks guys.

Mark McClain

Thanks, Andy.


Our next question comes from the line of Yun Kim with Rosenblatt Securities. Please state your question.

Yun Kim

Thank you. Congrats on a solid quarter and your progress towards the cloud. If you can talk about what has changed in terms of your go-to-market as you shift more towards the cloud and SaaS solutions. Obviously, you probably be focusing more on the land and expand going forward rather than probably a large – one large replacement opportunity that you saw – typically saw in the on-prem world. Do you expect the initial land deal size to be more modest going forward as a result?

Mark McClain

Yes, I’ll take a first shot at that and let Jason jump on. I think in general, we’ve always had a bit of a land and expand approach where we thought it made sense. As I referenced earlier, even historically with IdentityIQ, it was not uncommon for us – global enterprise to start using either a subset of our functionality, like just the governance compliance or just the provisioning side or to apply that just to a division or maybe to a subsidiary in one country when they have global operations. So there’s always been some flavor of land and expand quite typically. It’s been rare as we like to say that we would back up the truck and unload everything for a large global customer. So there’s always been some aspect of that given the nature of what we do.

I do agree with you that we would expect it in a SaaS realm, it’s more typical for customers to start with the one or two, maybe three services they need out of what will shortly be about nine services and grow towards that over time. So I think you’re right. I don’t know, if Jason would have any comments on how that would affect kind of financial picture we’ve been talking about.

Jason Ream

Yes. Yun, what I would say is to date we’ve seen not actually as much variance between our SaaS offering and our on-prem offering as you might think. Customers usually are looking proactively to revamp their – either build or revamp the identity program and know that they’re going to want various components. And so, tend to come in and purchase the components that they want. To Mark’s point, we tend to start with a portion of an enterprise and then expand to additional identities, additional users as that deployment rolls out and matures.

And the dynamic has played out pretty similarly on both the SaaS and the on-prem side. I think we’re cognizant that the industry is shifting generally in that direction and that people associate SaaS with that shift as well. If that turns out to be the case, we’re happy for that to occur. And we’ll just take advantage of shorter deals – shorter sales cycles and more rapid transaction velocity if that’s the case. But to date, we haven’t seen a significant difference between the two sides.

Yun Kim

Okay, great. Thanks for that answer. In terms of the, I mean, it seems like we’re – I’m just kind of curious, are we at an inflection point between the on-prem and the cloud where you might – can we expect to see certain on-prem installed-base or installed customers to start thinking about migrating over to the cloud starting this year.

Mark McClain

Yun, this is Mark again. No, not particularly. All of our on-prem customers, many of them who had been with us over a decade, obviously some signed up in the last quarter, they’re aware of our SaaS offerings. And for the most part, as they look at this and their own software environments, if a product is meeting their needs, they’re not necessarily motivated to move from one product to another just to make it SaaS. What we do see and we’ve commented on this I think in prior calls, more and more when people have our on-premise software product, we could say on-prem, but say software quite often now they will deploy that product, that software from us, IdentityIQ in the cloud, Azure, Amazon Web Services, Google Cloud, et cetera. So it’s very common for the customers to have a mandate not to do new deployments in their own data centers, but that doesn’t necessarily drive them to SaaS.

And so what we’ve found is the customers who have IdentityIQ that are generally quite satisfied. We’ve talked for years about our incredibly high renewal rates from a maintenance standpoint, they’re not necessarily pushing us to migrate towards SaaS. We get a handful of those discussions every year and I would expect that may increase a little year-over-year as we go forward. But it’s not a significant part of what’s happening in our install-base. But the great majority of our IdentityIQ customers are perfectly content and sometimes address their cloud concerns by just moving that deployment from their own data center to the cloud.

Yun Kim

Great. Thank you so much.

Mark McClain

Thanks for the question.


[Operator Instructions] Since there are no further questions left in the queue, I would like to turn the call back over to Mr. Mark McClain for any closing remarks.

Mark McClain

Thanks very much operator. We appreciate everyone’s time and interest on the call. We kind of expected there might be a little challenge doing the call in the middle of RSAs. So many of the folks in our industry are probably quite busy with that, so we do know some set of folks may have dialed in and not been able to do much on Q&A today. But we still appreciate the time that everyone took to listen in. Please do follow-up with us if you have questions that we can answer later. Thanks for your continued interest in SailPoint. Thanks and have a great day.


This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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Ping An Insurance (Group) Company of China, Ltd. (PNGAY) CEO Lu Min on Q4 2019 Results – Earnings Call Transcript

Ping An Insurance (Group) Company of China, Ltd. (OTCPK:PNGAY) Q4 2019 Earnings Conference Call February 21, 2020 7:00 PM ET

Company Participants

Sheng Ruisheng – Joint Company Secretary

Jason Yao – EVP & CFO

Lu Min – Chairman & CEO, Autohome, Inc.

Xie Yonglin – Co-CEO & President

Jessica Tan – Co-CEO, EVP & COO

Ma Mingzhe – Founder, Chairman & CEO

Conference Call Participants

Charles Zhou – Crédit Suisse

Kailesh Mistry – HSBC

Sheng Ruisheng

Okay. We will get started. Good morning. Dear investors, welcome to the Ping An 2019 Annual Results Announcement Meeting. I’m the moderator, board secretary, my name is Sheng Ruisheng. We know we are affected by the disease, and we will have this meeting in video conferencing and telepresence and conference calls. And we have Mr. Ma, the Chairman and CEO of the company; President and co-CEO, Xie Yonglin; and Jessica Tan, co-CEO; and Jason Yao, CFO; and Chief Investment Officer, Mr. Timothy Chan; and also the new — Mr. Lu Min, Chief Insurance Business Officer. And we will start with Mr. Jason Yao to introduce the performance in 2019. And then Mr. Lu, Mr. Xie, and Ms. Tan will go through the different business units, and we will answer the questions afterwards. And I’ll invite Jason Yao.

Jason Yao

Ladies and gentlemen, good morning. Welcome to the Ping An 2019 Annual Results Announcement Meeting. Thank you for your support and trust in Ping An. In 2019, we know it’s the starting year for the second 30th year of Ping An. And the global economy has been slowing down, and China has also transformed from rapid growth to solid growth. And Ping An has the new strategy of finance and technology and finance and ecosystems. So we want to take advantage of those strengths, and we also have enjoyed the solid growth in revenues, profits and many other things and laid a solid foundation for the next step for the group.

And in Page 5, we have seen this before, I believe. That’s our strategy. Next one,is the 2004, since our IPO, this is our strong and consistent track record. Earnings per share, CAGR has been growing by more than 25%. And total ROE average growth has been growing by 17%. Especially for the past 5 years, it’s more than 20%.

Now let’s look at 2019 performance. In 2019, we have been dealing with the complicated environment. So we have enjoyed solid growth. Operating profit growing by 18%, and net profit growing by 39%, dividend per share growing by 19% and operating ROE is close to 22%. On this page, let’s see the customer contribution. And retail accounted for more than 92% of the operating profit. And for retail and corporate and other operating profits, including the offsetting, the corporate growing solidly, and other operating profit has been declining a little bit.

Now let’s look at operating profit in different units. The group operating profit is the most important because it’s related to the dividend payout. In 2019, we have been growing by 18% because we have strong growth in life and health, property and casualty. And technology has been declining in terms of the operating profit because we are investing heavily into technologies. Group ROE is almost 22% in 2019. Under IFRS 9, it’s more than 24%. For life and health, the operating ROE is more than 40%.

Now let’s look at the adjustment process from net profit to operating profit because we have excluded the volatile items which can reflect the performance and also the trend going into the future. In 2019, the net profit is CNY164 billion, operating profit is CNY147 billion. There are three differences. First is we have CNY19.4 billion increase in the investment revenue because of higher — five assumptions. And the other one is deducted for the impact of the discount rate. And in last May, we have commissioned new policies and tax policies. That’s why in 2019, the income tax has been reduced. But in 2019, we believe this is a one-off, in fact. It’s CNY14.5 billion. It’s excluded from the operating revenue. And in 2019, the life and health has been growing by 25%. Because the residual margin has been growing, the release is 74%, accounting — inside the operating profit. And we also have seen some discount rate of CNY910 billion, so that’s contributing to the residual margin.

From this slide, you see, in 2019, the residual margin release 73% are from long-term protection life products. And the release in the opening has been declining to 9.5% because of the new business growing — has been slowing down, and the in-force percentage is growing.

Now let’s look at the dividend and capital situation. For the past 5 years, the dividend is growing. CAGR has been more than 40%. And in 2019, we have a very solid capital adequacy and dividend per share is growing by 19%, is RMB 0.0205, but based on the operating profit, the dividend payout ratio is 28.1%. And in 2019, the general meeting has approved the CNY5 billion to CNY10 billion buyback scheme, and the CNY5 billion has been realized. The rest of the quota will still be effected by the April 28 this year. This is the dividend. And we have used the cash flow to buy back share. And we have also realized the convertible bond and the free cash flow is still very healthy. The adequacy and solvency level of the group, you can look at the group, including subsidiaries, the adequacy is very high and is still growing.

Next slide. So every quarter, we have stress test to make sure we can deal with any challenges with healthy solvency. So in 2 situation. One is the declining of the 30% in fair value of equities asset. The other one is declining of 50 basis points in interest rate. You can still see the solvency level is more than 220%.

Next one is the investment portfolio of insurance funds. In general, the portfolio has been growing. By the end of 2019, it’s CNY3.2 trillion. Nonstandard debt has been declining from 15.8% to 13.4%. And we also have used the IFRS 9 accounting rules. You can see 18.3% of the investment are actually under the category of the fair value of the equity product that’s affecting the volatility in the P&L. That is why we focus very much on operating profit because it’s based on the 5% of assumption of the yield for insurance product found in the investment portfolio.

So in 2019, the ROE is 5.2%, the total return is 6.9%. And in the corporate bond investment and it’s declining from 5.4% and 99% of the rating are AA in Page 26. And for the nonstandard debt asset in Page 27, we are trying to stay away from the high risky industries and make sure we are trying to improve the yield of the total portfolio. The maturity rate of the remaining portfolio is 3.68 years, and we haven’t seen any of the NPLs.

Now sustainability and honors in Page 29. We use the international ESG standard to make sure we are sustainable in our development. We have been focusing on ESG at the group trying to use that rules into our strategy. In 2019, we are the first Chinese company to be affiliated to the principles for responsible investment of UN. That’s the first China company. And we’re also the first DJSI selected insurance company in China. We are also included in Hang Seng CEI ESG Index. Page 30, that’s the honors and the awards. The brand value has been rising, ranking 29th of Fortune 500 and number seven in Forbes Global 2000. These are all the financial performances.

Now let’s invite Lu Min, Chief Insurance Business Officer, to introduce about the retail integrated finance and insurance business.

Sheng Ruisheng

Thank you, Mr. Yao.

Lu Min

Good morning. My name is Lu Min. To just introduce the 2019 retail integrated finance and insurance business performance. To start with the retail integrated finance. Page 33. In 2019, retail operating profit growing by 26% because of the retail customer — operating profit per customer has been growing. And retail customer growing by 11%. Operating profit per customer growing by 13%. Basically, contracts per customer is 2.64. And we had new customers of 36 million, including 14.9 million converted from the five ecosystems of the group. So we provide online service to them and try to sell financial product to them, so we can convert them from users to customers.

In Page 34, that is the increased customers and cross-selling performance. Currently, we have more than 200 million individual customers and more than 500 million Internet users. And 340 million of them haven’t bought any product from Ping An. So that is a huge potential for us to convert them. And we will continue to convert those users. And cross-selling has been enjoying great resource and results. In 2019, the cross-sell penetration ratio has been increasing from 19% to 36%. That is a very important KPI for cross-selling. We know the total customer base has been growing by more than 83%. And at the beginning, they are only buying 1 contract from 1 subsidiary. So this is a great achievement despite all the challenges. Now moving on to the insurance business, Page 36. Life and health in the — with the reform happening in the background, the embedded value growing by 24% CAGR. It’s a very strong growth for the past 5 years.

Next page. In 2019, life and health operating ROEV was 25%. We know our new business is slowing down, but the scale is still big compared to the in-force product and with very high ROEV, we also use the conservative discount of 11%. The embedded value expected return is rather high.

In Page 38. Now please go to Page 38, and it is a new BV by distribution channel. Our life and health insurance NBV rose 5.1% in 2019, aided by the steady growth in agent channel and a strong performance in our bancassurance. Our high protection business accounted for 83% of the agent channel NBV, largely stable on a yearly basis.

Next Page 39. And we are proactively following the regulatory requirement on protection-oriented transformation and accelerated the playbook of the high-value protection business, which was the reason of slight decline of FYP by 3%. Our NBV margin is now 47.3%, up 3.6 pps Y-o-Y, driving up overall NBV growth.

Please go to Page 40. And now let’s take a look at the agent channel, the biggest NBV contributor that accounted for nearly 90% of last year. The agent channel delivered 5.9% of the NBV growth last year, driven by 16% rise in NBV per agent, which was offset by a 9% decline in average number of agents.

Please go to Page 41. And this is about agent productibility. We have proactively conducted business reform to promote the agent productibility growth. Agent income average RMB 6,309 in 2019, slightly improved on a yearly basis. Average new insurance policies per agent per month were 1.38. Agent income from life products remain stable.

Please go to Page 42. That is how technology can empower the life insurance industry. In terms of the data-driven marketing, AI has been used for the interview, and it is 100% interview were AI aided. Ping An Life conducted over 6 million AI-based interviews, which can help us to save 680,000 hours. And we can also use AI to build the agent profiling to provide them the tailor-made training and our smart engine, which has been developed in-house and the AskBob has been used as a smart personal assistant to our agent to help our agents improve our sales conversion ratio, which has already been used to serve 340 million people. Where in terms of the data-driven customer service and — our smart customer service has already reached 50 million times last year and it can shorten their service time to less than 1 minute. And currently, we have already served 18 million policyholders and 96% of the clients have the fast service. At the same time, in terms of the data-driven operations, we also support the anticipated trend, make timely decisions and taking actions ahead of the others.

Please go to Page 43, let’s take a look at the P&C business. In 2019, P&C business is performing very well. Its net profit rose by 86%. The operating ROE was 24.6%, and the three year average ROE reached 20.4%.

And now I would like to draw your attention to Page 44 on the P&C insurance premium income. In 2019, P&C insurance premium income rose 9.5% Y-o-Y, evenly distribution on all channels. The non-auto insurance premium income was up by 17%, and which is improving its ratio and contribution in the total premium. And now please go to Page 45. That is the quality of the P&C product. And in 2019, you can see that our service and combined ratio was up by 0.4%, still better than the industrial average.

And now please go to Page 46. And we are still building technology to empower the P&C insurance business. In terms of the auto insurance, we use AI image to help to provide over 90 million registered users, about 49 million of whom are auto insurance customers of the Ping An Property. And at the same time, it only takes 3 minutes to take care of the — and without the — no back-end menu operation needed. At the same time, you can see that our monthly active user in December is already more than 25 million. While in terms of the P&C insurance, we provide the corporate client with the Know Your Risk service.

And next, I would like to welcome our Co-CEO Xie Yonglin to work you through the corporate financial services and the banking business.

Xie Yonglin

Thanks. Thanks to Mr. Lu. And now please allow me to take a look — work you through the corporate integrated finance. Page 49, we show you the corporate business growth and its performance in 2019. From this page, you will see that we are working on customer building and also works on the technological support in order to provide our service, in terms of the customer service, and we started to build the customer into the big clients and SMEs.

While in terms of the collaboration, we also did some organizational reform. And we also have to — also rebuild our mechanism and organizational structure to support our customer. On one side, we worked on the smart business, where in terms of the data, we also help to improve the information collection from our corporate clients and in order to build more database for our corporate clients to build the customer label and tag to make sure that we can digitalize the whole process of matching the corresponding surveys to our clients.

I also would like to specifically emphasize on our corporate financial service committee. We have 20 members of this committee. According to the nature of their business, we have already built them into the different principles on 4 models, including the simple business, sophisticated investment and financing business, transaction business and embedded business. We hope that by leveraging the vast resources and — we can collaborate over the resources and the synergy. And even from one way to the auto, we can work with each other to form the synergy. After almost the 6 months of operation, the efficiency has been greatly improved.

At the same time, you can see the corporate business is growing sharply, and jointly speaking, that corporate integrated finance premium size was up by 24%, 116% for the corporate channel and 140% for the size of the integrated financing. And these are all the result from the explosive business growth model brought about by the corporate finance service committee.

Where at the same time, on Page 51, you can see with the support from the group, we are consolidating our business of locating the premier investment and assets for the corporate business and the retail business. And at the same time, for the whole year, also underlying asset invested by the insurance fund sourced from the corporate business rose by 101.3%.

Let’s now go to the Page 53. And you can see, we see a growing profitability and 13.6% Y-o-Y increase in the net profit. And the noninterest rate income. And we see that our earnings is on the proper trend. At the same time, it can help us to further consolidate the retail business. And currently, its net profit is already 69%. And it’s also been greatly improved. At the same time, I would like to emphasize the retail business was growing fast, where at the same time, our corporate business and interbanking business are all gaining great momentum for development. That’s why we call it a structural optimization. And our business structure is now more evenly distributed.

Now please go to Page 54 and 55. You can see that for the past 3 years and now we’re going back to the healthy track of development, but we always keep the prudent attitude of the risk control and all the risk-related metrics are in the process of optimization. By following the overdue 69-day — 60 days standard, our overdue loan ratio, the loan coverage ratio are all on the good momentum. And in 2019, you can see the over — decreased the percentage of the loan 90 days overdue. And the loan duration of the overdue 90 days has already been decreased dramatically, which only accounted for 1.58%.

And the overdue deviation rate of the loans 60 days is already below 1, where at the same time, we were also improving the provision. And in the Q4 last year, it was up by 30% and reached 34% Y-o-Y business. That’s why our risk withstand capacity has been greatly improved. And now please go to Page 55 and you can see from the Page 56. And Ping An has already completed conversion of RMB 26 billion worth of the convertible bonds in September 2019, establishing multiple market first. And now currently, our tier 1 capital adequacy ratio and the core tier 1 capital adequacy ratio reached 9.11% and 10.54%, respectively, where at the same time, in the near future, our supplements of the capitals would get into a very healthy track.

Please also go to Page 57. And in order to work for the new development, we’d like to work on the ecos bank, digital bank and the platform bank as three name cards. Our retail, corporate and interbanking, the three business lines are also adopting the 3 + 2 + 1 operation strategies, promoting the bank’s development to a new track.

And now please go to Page 57. We have already divided the development path for each of the business lines based on the established strategy and the new positions. We would like to stick to our principle, especially the 12-character principle. Where at the same time, we would like to define the new positioning during the transformation stage in combination with group’s finance and ecosystem strategy. And we also — each of the business line developed its own 3 + 2 + 1 strategy in accordance with the strategic direction and the new positionings.

And I would like to draw your attention to Page 58. You can see, we have three business lines grow on the clear strategies. And it’s because of the maintaining the edge in the basic retail banking team, especially our retail business, our consumer finance and the private banking, the 3 business are growing momentum. From the basic retail business, the AUM was up by 40%, and the number of the customer was up by 16%, likely to exceed 100 million. Where in terms of the consumer finance, our credit card in circulation is more than 60 million and private banking is also a shining point of us for last year. Our wealth customer number rose 32%. The private banking AUM was up by 60%. Many peers communicate with us. We found out we have 3 advantages: technological driving, professionalism and integrated finance advantages.

And now please go to Page 59. For the past few years, especially in the past three years under the great leadership, we have already supported to build a whole set of the digital transformation platform and system. With these statistics, the operating revenue per capital was increasing by 80%. And the operating revenue per outlet was up by 31%. And in terms of the operating cost, we continue to improve the number of AI customer services, and now it’s already accounted for 90% and it can help us to reduce the handling cost of the credit card and debit card by 30% and 50%, respectively, saving CNY100 million in terms of the size of the outlets and contributing to the net profit by 0.4%. And this disease currently happening, we have been affected a little bit. But because we’ve strong digital and online capabilities, and we — the key business has been recovered by 60%. AUM has been recovered by more than 110%.

Page 60 about the bank and the synergy with the group. The result of the bank is because of we have a group in the background. On one hand, group is redirecting high-quality traffic to the banks and the group customers are of higher quality. And on the other hand, banks are also selling insurance products and contributing more to the group. And last year, the revenue growth has been 13.2%, selling insurance product through our bank channels. And so we have enjoyed higher revenue for the bank, but also contributed to the insurance business of the group.

In addition to the digital achievements, we also took advantage of the accounts, data, customers and products. We have this four channel and one platform engine projects. Got — account, data, product and equities are all connected and creating a unified customer service marketing platform. And for Page 61, for the corporate business is also improving because of higher capital adequacy level. And deposit balance grown by 11%, loan grown by 15%. And also, we have the asset- and capital-light strategies. And corporate noninterest income has been improving. And the strategy is also reducing the risks of the corporate loan, and it’s very sustainable in our business development.

And in Page 62. The bank has been the engine for our 1 + N strategy. And bank sold insurance grew by 327%. And the investment financing project scale has been improving by 138%. In addition to those data, we have also made a lot of progress in terms of business model innovation. We had commercial bank, investment bank and investment tactics to serve our big clients with very good results and which can be replicated in the future. It is not only the driver for corporate business but also for the new business model of the group 1 + N engine strategy.

In Page 63, the interbank business has also been growing very strongly. We have introduced a transaction access from the Wall Street and developed our in-house transaction system. And the transaction business has been grown by 152%, the bond transaction growing by 178%, ranking number three in China in terms of — as the core transaction — traders and interest rate swap ranking number three, standard bond future ranking number one in Q3. And also, the interbank sales team is also gaining ground and growing at 124% in terms of interbank sales business and the Ping An Bank. The net value product scale improved by 152%. And the subsidiary of wealth management has been approved, and we have used the shortest time from submission to approval.

In Page 64, the technology. 11 AI mid-platforms have been in production, including sales enablement, product, service, management and risk control and lay a solid foundation for our digital operation. In addition to the group technology, the bank itself is also focusing on investing into technology capabilities. Now we have more than 7,500 engineers in the Ping An Bank, growing by 34%, leading the industry. So technology innovation is a very key strategy for us. It’s also important for us to improve the efficiency and the efficacy.

That concludes my presentation on corporate finance and banking. Now let’s welcome Jessica Tan, the co-CEO, to introduce the technology business.

Jessica Tan

Thank you, Ms. Xie. Let’s briefly talk about the technology. In Page 66, you can see in 2019, the 11 technology subsidiaries,have been developing in the — at different stages. Lufax, Autohome, in the Phase 4, the profit has been improving. Good Doctor is in the Phase 3. You can see the revenue explosion. And it’s — we are reducing the loss. And OneConnect is also in Phase 2, still investing. So we are investing into new products. 32% of investment has been improved to 41%. In general, the revenue of technology, the revenue represents the sustainability and also the ecosystem enablement. It’s — the revenue reached to CNY82.1 billion, growing by 27%.

In Page 67, it’s about our innovation in technology. So technology is not for the sake of the technology because we are investing into the core applications. So we have 57 labs, 8 institutions, 110,000 engineers and 35,000 R&D employees. So last year — by the end of the last year, we have 21,000 patents, including 96% of them invention patents. And in terms of the fintech and medicine technology, we’re ranked number one and number two, respectively, in the world.

So now next one is about the fundamental technology in Page 68. Last year we have won 47 championships in technologies. Two of them are semantic understanding. So that means we need to read 150,000 articles and answering 50,000 questions, not just the average articles, but also medical, very complicated articles. So we can understand what’s happening in those articles, we have got some championship in the world.

So the value here is at Page 69. The first value is to enable our main business. Like Mr. Lu Min, Mr. Xie have shared with us already, how we use technology to enable insurance and banking business of the group. And last year, we are focusing on 3 things: improving efficiency, reduce cost and reduce the risks. So a few examples to share with you. In terms of the efficiency, the agents for the past 2 years, we can cover 100% of them using AI interview. So it’s mostly happening online and supported by off-line efforts. We interviewed more than 6 million agents, so we can easily identify the high-caliber people and talents.

In terms of cost reduction, last 2 years, we are using cloud robot — bots. So the bots had 850 million contacts with the customers online, reducing the cost by RMB 1.1 billion. In terms of the risk reduction in the bank and inclusive financing, 0 and 1 reminder are using AI bots and manual reminders. The quality is better and 97% reduction in customer compliance.

In Page 70, now let’s look at the performance of all the different sectors in technology. First, starting with the Lufax Holding. Last year, Lufax under the reform, we can still enjoy healthy growth. In terms of customer indicators, we have 44 million customers, growing by 9% year-on-year. And in terms of the business indicators, AUM is not growing. It’s actually declining by 6.1%, but the structure is healthier. For instance, 51% of the AUM are standard products and more than 20% are from our ecosystems and 30% of them are retail.

In terms of the loans, we are constantly improving. The balance is more than CNY460 billion, growing by 23%. And the quality is also improving as we speak. 2 years ago, we disclosed that the overdue of 30-day is — the ratio is 2.3%. But last year, it’s only 1.9% because we are continuing to improve compared with the competitors. It’s normally 5% to 11 — 13%.

Page 71. It’s OneConnect, and we went IPO in December, last December in the U.S. There are 3 improvements. First is customer. The strategy is not only providing service to the 600 banks in China, 99% of the city commercial banks and 52% of the insurers in China, we are also focusing on high-quality customers and growing by 114% to 473 high-quality customers. They have higher quality and high stickiness, and the revenue are sustainable and — 74% of them. And the revenue of OneConnect grew by 65% to CNY2.3 billion. And we are supporting a huge scale in this plague that’s happening. We are investing heavily from 32% to 41%. So we’re still investing heavily. But we have seen some results during this recent period. And in 2 weeks, we are supporting our players in the industry to recover their business and for 21 banks, we can provide online marketing and sign-off process and 19% of — 19 banks have one’s life. And at Ping An Group, we have 1.4 million employees and agents. In the February 3, we can have online office activities. We are still the leader.

And next page is the Doctor — is medicine, Page 72, talking about Ping An Good Doctor. Last year, Good Doctor has been growing strongly, especially during this epidemic. Now we have more than 315 million registered users and DAU 730,000. During the epidemics, the new registration and online consultation has been growing by five, sometimes 10x. And financially, we are also exploding in terms of the financial revenues because it’s in Phase 3. Last year, we grew by 52% in terms of revenue, it’s CNY5 billion — more than CNY5 billion. Thirdly, Good Doctor are constantly working with partners to provide online services and create synergy with offline services. We are working with more than 3,000 hospitals and more than 100 tertiary hospitals. We are working with more than 90,000 drugstores. So patients can enjoy online, offline service at the same time. Last year, our colleagues at Good Doctor has been very busy. And we are working in 56 premises or cities. So sometimes, the — it’s — the patients, it’s not easy to go to the hospitals at these days, and we can provide online consultation. And we’re trying to continue to improve that online, offline consultation services.

Page 73 about Autohome. Last year, we know the auto market has been declining by 8.4% in general, but we have enjoyed great growth. In terms of customers, DAU on our app has been high quality from — improving from 29 million to 36 million. In terms of financials, the revenue has been consistently growing. It’s now CNY8.4 billion, growing by 16.4% and — among which, 18% of the business are actually new business created for the past 3 years, including advertisements, lead. We also have data enablement, transaction enablement and the financing enablement services. So we are covering 90 — more than 90 OEMs. We have 36 data products to help the OEMs to improve their operation. We are working with 27,000 dealers. 17,000 of them are using our data cloud products. We also facilitated CNY24 billion financial — financing services.

Last but not least, and please turn to Page 74, the Smart City business. It’s a company that has been newly established for the past two years. We are now serving 115 cities, including 500,000 companies and 50 million citizens. And let me give you some example of supporting governmental service, promoting business development and improving people’s livelihood.

In terms of the supporting government services, we supported the government of managing the administrative business. And we also help the customers — the government managing the cost, improving the ROI, especially on some key infrastructure business and projects. And we would then suggest government of leveraging the vast resources of investing the money in the most needed area. And in terms of promoting business development, we’ve now served 500,000 companies to optimize our business environment. We’re working with the government of providing enterprises with planning service and regulation to improve the business environment for enterprises.

You can see in Guangdong province, this year on we started to raise Guangdong municipality of providing a service plus financing platform to serve 110,000 companies, especially SMEs in the microeconomic situation, so that they can be served by the banks with feasible financing solution. Well, I also would like to talk about improving people’s livelihood, house, culture and convenience. During the epidemic outbreak stage, we are working with the House Commission of China of providing 15 province epidemic reporting and 8 daily updates. And every day, we have 1 million citizens using our AskBob services and also using our medical consultation to trying to understand the situation of epidemic outbreak. And we say that around 10% of the Chinese doctors are also using the AI-assisted diagnosis provided by Ping An to help to do the quick diagnosis during the epidemic outbreak.

You can say that China is also launching new treatment pathways on a daily basis. So by having those numbers and those information to our doctors, they would work more effectively on the front line. Where yesterday in order to support the epidemic control, Ping An, the Smart City also launched our AI image. By having a CT scan, we can support the image rating to the doctors. Actually, the image rating and the diagnosis is not easy. For the lungs, 1 image takes around 300 different images and nodes, where yesterday were studied by leveraging the AI-based image rating support, and only within 15 seconds it can help to support the image rating for any of the AI-needed area. So that’s what Ping An would like to support the control of the epidemic outbreak in China.

And thank you very much. That’s all for my introduction about the technology business. Where in the appendix, we also provided you the profit table for all business lines, and for your reference if you have any questions and now it’s the QA time. Thank you.

Question-and-Answer Session

A – Sheng Ruisheng

Thank you. Thanks for the management team. And now it’s time for QA. [Operator Instructions].

Unidentified Analyst

Thanks for the management team of providing me the chance for the first question. I have two questions regarding life insurance. As we can see, by the end of last year, you started the life insurance reform committee or task force. Would you like to work us through their work plan? What the priority of their work? And how long it’s going to take to reform the life insurance business of Ping An Group? And the second point is on the revenue and profitability. And you can see the revenue from the life insurance per capital was growing last year, but it’s lower than 6.4%. I’d like to ask the management team what is the fundamental reason? What kind of countermeasures you’re going to take in order to improve agent income for the life insurance business? That’s the 2 questions I have.

Lu Min

Thank you. Let me answer your question. The first question is regarding the goal of the life insurance reform. Why should we do the reform? Let me just give you some explanation in this regard. For Ping An Life Insurance, our reform started from the mid of 2018 in order to respond to the new regulations and we elected to do more protection product in the business. Where now the reforms being done for 1.5 year, in this process, we also helped to identify that in order to transform the product, the whole system and the whole mechanism also need to go through the reform accordingly, where you can see the outbreak of the epidemic also shows us how urgent we need to do the reform of the life insurance. So I think in 2020, we’re going to take this whole year to enhance our reform over the life insurance business to make sure in the following years, we’re going to have a robust yet steady and healthy growth of the life insurance in the near future.

In terms of the goal of the reform, first of all, our NBV would be growing more robust in the following years. And the second goal, the income and the productivity of our agent needed to grow continuously. If we can hit these 2 targets, then we call our reform successful. And that’s the 2 targets we have in our mind, where in the near future, for sure, we’re going to do multiple policies in order to secure the success of the reform.

And for Ping An Life Insurance, we have 3 channels: agent channel, and the bancassurance as well as the on-site insurance. And by leveraging the reform on three channels, we would like to further enhance our momentum for future development, so that we can lay a solid foundation for the future business growth. Well, in terms of the product, we’re going to surely take the customers’ need in our mind and follow what is customer needed. We’d like to leverage the integrated finance advantage of our service. We would like to also work on a systematic product structure optimization so that we can launch more product that really is needed by the customer. Well, in terms of the sales model, I won’t elaborate too much on this question. And that’s my interpretation of the reform. Where I also have saying that is done by Jessica. Where besides of our agent, another reform we’d like to focus on is on leveraging technology. You can say from last year on, we emphasized on online to offline integration, and we also would like to have the outside yet remote service integration. And thirdly is about the data-driven and AI-driven solutions.

So the matter for the smart recruitment I mentioned just now, assisted by AI, the online policy handling and the digital marketing as well as the digital and smart-driven business management, we are going to leverage the cutting-edge technology in order to improve the productivity of our agent. Let me give you two examples. First one on training, where attach is greater importance for the onboarding training for the new agent, especially to provide the customer right training for each of the agent and also agent with different personalities and characters and scheduling would also be provided with tailor-made training. And each week on each day, based upon their study pace, they can help to collect [indiscernible] in order to receive the training more flexibly.

And the second example is on business management and the digital marketing and many of the event management truly depends on the visit of the customer. And the epidemic outbreak is also a good opportunity for us to change our way of visiting the customer and we’d like to leverage the digital marketing of launching more offline yet online integrated customer visit. By leveraging technology, we support our 1 million agents of talking and communicating with the customer online and off-line. For example, we have 30 different categories of the information from updates to education. According to the appetite and the preference of the client, we can then send the corresponding information to the customer, which will make the marketing more emotional and more friendly. So these can truly help to improve the dynamics from the customer acquisition to customer communication, and that’s how we’re going to leverage technology to do that.

Jason Yao

The second question, and you were also asking about the income of the agent for the life insurance business. For sure, last year, we see a growth of agent income of the life insurance business as an analyst has mentioned. The agent income for the life insurance was up by 1.8%. Our NBV was increasing 5.9%, but why the life insurance agent income was only up by 1.8%. And let me explain the reason to you because actually the income of our life insurance agent are included with the first year premium commissions and the persistent policy commissions. It’s being taken as a whole and it’s not only directly related to the first year commission. That’s why you see the numbers are not as high as NBV growth rate.

And another reason is also because last year, the size of the agent team is also being decreased. So that’s why we have last agent income increase for last year and last year for the first year commission fees for the agent. We also launched some long-term protection product and a long-term protection product, it’s first year commission also being adjusted. And that’s why they have some impact over the life insurance agent income. But jointly speaking and the life insurance agent income is still on the uptrend, attaches greater importance to our life insurance agent. They are our front-line workers, and they need to seek for the sustainable and healthy development. Income is a key metric for them. So that’s why, as Mr. Lu mentioned, in the near future, we’re going to optimize the training to our agent. At the same time, we also would like to build the best product mix and the portfolio to take care of the cost and the needs to help to improve the quality, income and the productivity of our life insurance agent.


Next question, Mr. Zhou from Crédit Suisse.

Charles Zhou

Ladies and gentlemen, my name is Zhou Chen from Crédit Suisse. My first question goes to Mr. Xie Yonglin. And in Q3 and you started to work as a CEO of the group, so is it possible for you to share your prospect of Ping An Group in the next 3 to 5 years, especially you used to work in collaborating of different units and you are responsible for the corporate finance service committee. So could you help us to identify any opportunities and the big prospects in the near future?

And my second question is also regarding the life insurance reform committee. Is it possible for Chairman Ma to share with us whether you’re happy with the life insurance reform work here in this moment of the time? And when can we say that the agent team could be stabilized and their income could be up by a double-digit number?

And another question goes to Jason Yao. And you mentioned 80% of the increase are being driven by P&C insurance business. And I find out for the life insurance, its operating profit before tax is only a single-digit number growth. And so Jason Yao, can I just confirm with you whether my interpretation is right or not? And if you are under pressure, does it mean that in the near future, the profit — the operating profit growth would be kind of slowed down. And is it going to also impact our dividends in the near future?

Sheng Ruisheng

To remind you, for the fairness, no more than two questions, please, in the following questions.

Xie Yonglin

To answer your first question, I think you have addressed the first question to me. The strategy of the group has never changed to become the global leading integrated service — financial service and the life service provider for the retail world. But it has been improved. In recent years, we’ve been focusing on finance technology, technology ecosystem. So we use technology to enable finance service.

So the efficiency of the main business, the quality of the main business in our finance practice will be better to make sure we are sustainable in our development as a global leader. And in recent years, we’ve been using technology to enable ecosystem, trying to build new ecosystem business models. And we also take advantage of ecosystem to contribute back to the traditional finance business. That’s something we’ve been sticking to for the past few years, and it’s not going to change because I am in the office now, and we are continuing to deliver on that. Like Jessica said, technology enablement for life insurance, for instance.

In terms of the recruitment, training of the agents, marketing management and it’s been playing a very important role. Technology is also helping the banking business, especially during this epidemic. You’ve seen that the online digital capabilities we’ve built for the past few years have of gaining grants during the pandemic. Their service is not suspended. It has not stopped their productivity, can be recovered very rapidly. And in addition to that, Ping An Group has been focusing on 1+N service to the customers. One customer, multiple products offerings, one account and one stop service. For retail business, that’s what we are doing.

It also true for the corporate business. Because the tactic might be different between B2B and B2C business, but the vision is the same, technology enablement is the same. We use technology for 2B and 2C business to build our ecosystem. So in the retail financial service committee, we will connect account equity products to establish a consolidated product to serve this platform. We also need to connect to the data. So the corporate committee. It’s also the same thing. We have achieved a few things. And you talked about the corporate finance committee. Last year, if you see the data, the data growth has been very rewarding for us.

In addition to fundamental database, we have customer base, business case — base, we have a product base. We use technology to build effective marketing and sales methodologies. So we analyze the companies in the corporate finance to identify products. For instance, insurance, P&C, auto insurance, welfare, protection scheme, leasing, SME loans. The underwriting approval have been controlled centrally. So the approver, reviewer, we will look at the penetration for 1 customer across different domains to improve efficiency because we can do that with the enablement of technology. We can consolidate the information and profile of 1 customer now. And in the future, at the group level, I think we’ll continue to focus on technology plus finance, technology plus ecosystem and the ecosystem will contribute back to the business. So that’s — nothing going to change there.

And then the second point, we will continue to deepen the 1+N for corporate and retail business to supply, in a way, in our technology. And I also shared something about the corporate finance service committee. I believe we were surprised to do it this year again.

Ma Mingzhe

Let me respond to the second question. I shouldn’t be here speaking because we know we have a very good team here. So since you are trying to understand the reform that’s happening, let’s share with you something. For the life insurance reform, first is why. Ping An Life started in 2004. We’ve been developing for the past 16 years with great achievements. Since last year or maybe 2 years ago, we discovered that the life insurance market has changed fundamentally. The macros has changed. The environment’s changed. The demand or requirements of the consumers have changed.

The traditional way of doing business is hard to meet the requirement of the new world. The dividend of population has gone away. And you see the industries have been developing in a different way. The logistics, for instance, the salary of the logistic industry is higher than before. We know Ping An agent, they have maybe 100% more in their salary compared with the average in the industry, but we don’t think it’s enough for the next 3 to 5 years. The compensation for our agents need to be improved. So for the past 2 to 3 years, we’ve been trying to discuss how to reform our life insurance. That is the why after development of 26 years.

So we need new methodology of doing business. And then the objective of reform because we want to be the leading life insurance company in the world, not in terms — not just in terms of scale but also become a benchmark of the industry, a new business model for life insurer. We want to be the global leader. We are not satisfied with what we have achieved so far. Because to deal with the future challenges, I think we need to think ahead. And we believe the traditional way of life insurance for the past more than 100 years need to be disrupted. There should be a new iteration of the business model for life insurance. That is our objective.

And then how. We are focusing on 2 things in the reform. First is the channels. Mr. Lu clearly indicated that. He has — Mr. Lu has 20 years experience in life insurance. He knows inside out, and he’s been with the company. He worked in the life insurance. He was the Director of the Corporate Strategy Center. And then he also worked at Autohome with very good accomplishments during his time. And he has a vision, he has experience, and he has leadership and he has business acumen. And we know life insurance reform is not done by 1 person, it’s actually done by a much bigger team. And like I said, we are focusing on the channels, agent channel, focusing on quality development, focusing on improving the compensation for agents. From — this is the transition we are trying to make from scale to quality and compensation for the people.

And the other focus is the online Internet insurance. Now we have 30 million offline policies. We are going to use new methodology to reactivate those offline policies. So we can sell them the integrated financial service and use that to boost our online performance because the life insurance awareness is different than 20 years ago. With the Z generation coming up, they need life insurance. Life insurance is now a lifestyle. It’s just a part of their daily consumption. So we can use online as an opportunity. Of course, it’s going to take time. We need to educate the market. It’s not going to happen overnight, but we still need to invest heavily.

And then bancassurance is also important. We believe in value orientation. We don’t want to sell short-term product. We don’t want to sell wealth management bancassurance product. The tactics and methodologies have changed in the new financial world. We need to reform ourselves. And the other point is about the products. In the past, we’ve been trying to sell the product from the corporate perspective — from the Ping An perspective instead of the consumers’ perspective. So we need to reform our product offerings based on the requirements of the consumers, but not only for life insurance, life insurance plus service plus and the scenario-based or contextual-based life insurance products. So based on — they might differ across cities, across agents and across different target groups. So based on the consumer requirements, but not only for life insurance but also integrated finance products. So one customer, one account, one-stop service, multiple contracts to continue to boost our integrated financial offerings.

Like Jessica said earlier, the reform need to take advantage of our technology capabilities, so technology will be immensely important to the reform including our digital recruitment system, online training system, digital marketing tools, data-driven customer service, for instance, and data-driven activity management, smart customer service. So we have seen some result, and the reform is underway. And we believe these reforms are very much leading the way around the world because we have the technology capabilities [indiscernible].

The fourth point is why we will be successful. Because in our road map, we call it 1 plus four road map. One means the first half of the year will be heavily impacted. The traditional life insurance policies are sold face-to-face. And the agent will not make much money recently because they cannot sell face-to-face and many things are happening online. But of course, there are restrictions for your online efforts, but it is actually an opportunity because we have seen very good result recently from Ping An Technology. So Q1, Q2 this year, will be heavily impacted for all the industries, not just us. And for the second half of the year, we believe it will recover soon. And we believe in 2021, we will go back to normal, a sustainable healthy growth, solid growth and based on the reform. That’s the one.

And then let me talk about the four. First of all, we see that we have more than 25 years most experienced management team at Ping An Group, and they have a market experience of more than 25 years with a very good track record and most of the experience. And my second point that we have the best quality agent in the market. Their productivity for the past 2 decades were always — applies above the industrial average. And then thirdly, we also have a very robust and strong integrated finance system to support our agent, to support them to improve their income, to help them to broaden their horizon. We are also to help them with a better career planning. Because for a company, if you really want to recruit the best quality agent to work for you, if you truly want to improve the quality of the agent team, you have to have a robust integrated financial product.

And my fourth point, we also have a strong technology to support us. So that’s why I say that for the life insurance reform, I’m also deeply involved in the reform process. I didn’t involve so deeply on the daily basis work because — but when there’s any resources, a coordination needed, then I will stand up to help to do the coordination work. And I’d say this is not led by me and this is being done by a big team. Lu Min is the chief leader who is taking care of the life insurance reform. The whole group is supporting him. And we have every confidence that the good result from the reform will be shown in H2 of 2020. And in next year, you will see we’re going to go back to a sustainable yet healthy business track.


[Operator Instructions]. The next question comes from Kailesh with HSBC.

Kailesh Mistry

I’ve got two questions. One on new business value and agency and the other one on the corporate segment. I think on the new business value, can you just provide some color on new business value and agency development in 2020? Specifically, should we expect another year where we see rising new business value per agent, increasing contracts per agent, despite the fall in the number of agents? And is there going to be any shape to that during the year?

The second question is on the corporate segment. I appreciate it’s just short of 10% of group operating profit. But there’s a new section in the customer development chapter, which is quite interesting. Are you increasing your focus on this segment as a source of — another source of growth? Do you have any targets on what contribution to group operating profit that could become in, let’s say, 3 years’ time? And also with respect to the bank, how should we interpret this for net interest income and also normalized credit costs going forward?

Jason Yao

Thank you very much. Because many of the investors are online and speak Mandarin,, then I shall answer in Mandarin. First of all, let’s talk about the growth of the new business value, and I see many people attaches great importance to it. And especially, the previous few questions were all talking about the life insurance reform, the robust yet healthy reform. The healthy growth of the business is highly relevant too in the reform. And I see that Chairman Ma and Mr. Lu and Jessica, they have already provided you many explanation, the clarifications on the life insurance reform, the goals, the targets and time line we made for ourselves for the life insurance reform of the group. I won’t repeat what is being said by them.

Where, in terms of the NBV growth guidance, I say that generally speaking, we don’t provide it to the market. But due to the epidemic outbreak, and Chairman Ma and Mr. Lu have already clarified that the epidemic outbreak in China where I see going to impact the revenue and the sales of our agent because of face-to-face communication and the contract and the customer acquisition would be negatively impacted by the epidemic outbreak and I hope that the epidemic could be well controlled in Q1 and in H1. And then we’re going to see a rebound of the sales of the life insurance product in H2 of this year. And for the healthy and sustainable growth, we hope that we’re going to see it in 2021. And that’s my answer regarding the NBV.

Xie Yonglin

Thank you. Thanks for the second question regarding the corporate finance service committee, I have to say that by 2019, last year, our corporate finance service committee was performing well, but I have one concern in my mind. Majority of you concerned about the corporate finance service committee. [Indiscernible] said, we are of the track of our strategic environment of the group, for Ping An Group, still we would like to become a global leading retail business and financial service solution provider in the world. But this positioning of the group won’t hurt our corporate financial services committee business. And you can see that majority of the bond has been issued by the enterprises in the market.

And the P&C funds were being [indiscernible] into the world economy. So still corporate business is a key part of our business. And on one side, we provide premium quality to the insurance business and the retail business, while at the same time, corporate business is a key for us to build our ecosystem. But for Ping An, our strategy and our way of doing the business, won’t like the traditional financial institution. Majority of the profits are coming from corporate business. That’s not Ping An is going to do. So for Ping An, our way of doing business for corporate finance are having 4 models. As I mentioned in my presentation, the first one is a so-called simple business. For example, P&C insurance, protection business, leasing and micro loans. These are being called as a simple business, where for credit loans and it’s actually easy to perform very well. And it’s — and the leasing service too, it can actually have the light assets yet the light strategy, where the second business I mentioned is a sophisticated investment and financing business.

For China, we have some big SOEs, like the Merchants Groups and the China Electronics. And those big companies they have the financing model, integrating the direct financing to indirect financing or even sometimes, they have to reduce the leverage. So we have to have the investment bank plus commercial bank plus investment strategy to serve those SOE clients. Sometimes — and they even need our private bank to support them for investment. And we think such a request, it won’t be able for us to support a client with single service, we need it as an integrated solution. And also, the financial notes from those SOEs would also become the prime assets for us.

And Ping An would like to build 5 ecosystems including health care, government affairs and auto and financial institutions. We think that 5 ecosystem, B2C business is definitely not enough. We have to have a B2B and a B2C service models at the same time, so that we can build a platform with a good threshold. Where last year in sophisticated investment and financing business, as I mentioned to you, our financing size was up by 153% and you can also clearly see by having commercial bank plus investment bank plus investment model and strategy, we have a dual light model and we have less capital needed, where at the same time, we can work for the client more comprehensively which truly anchors the need of the corporate finance where at the same time, we also have the interbank business.

And at our company, we have many bond traders. We have our [indiscernible] trade, [indiscernible] team working for us for the bond trading and around 70% of our life insurance products, they have a good experience of the bond trading, high-frequency bond trading and allocation bond trading and many of them are truly good at bond trading. So we have to integrate dual capacity together in order to seek for a good, no matter it is for annuities or the interbanking or the bonds or funds, all those capacities need to be shared systematically within the group, even the strategies and the research over each of those business needs to be shared within the group.

Well, in terms of the corporate business, if you really want to make it big in size and high in quality, sometimes you won’t be able to see it from the balance sheet. The key that you have to have a prudent risk appetite. You have to choose the right verticals and the industries to invest in. So we have the vertical-specific, region-specific and product-specific strategy. We would like to leverage technologies to reduce operating cost. We have to be prudent in selecting the verticals and the product to control the costs. And then through the research, we can also well manage the risk so that we can develop the corporate business in a more healthy and robust approach. And that’s my comment over the corporate finance business. And I’d say this year, our corporate business is going to have a good scorecard again.

Sheng Ruisheng

Due to the time reason, we’d like to allow the opportunity for the final one.


The final question comes from [indiscernible].

Unidentified Analyst

My name is [indiscernible] from Merchant Securities. I have two questions. The first question is about the epidemic outbreak. So all the management members, how are you going to assess the impact of the coronavirus outbreak to company’s operation? For example, when should our agent come back to work? Whether it’s going to impact our new recruitment. And is there going to be any short-term strategies to stabilize our income and our employment during the coronavirus outbreak? Are there any kind of adjustment and countermeasures from the corporate end to hedge the risks? And the second part is about this operating reliance and you can see what are the reason why the surrender rate was upgoing? So what’s your future plan? And what the reason?

Lu Min

Let me answer the first question, please? Well, in terms of the epidemic outbreak, Chairman Ma mentioned, it’s surely going to have some impact over the life insurance business, and the impact won’t be small because we are not allowed to work as a group, we can’t provide a face-to-face training, our agent won’t be able to have the face-to-face visit to the client. They also can’t sign the contract with the client face-to-face. So for sure, the epidemic outbreak will impact our life insurance business.

So what kind of countermeasures did Ping An take? We have a lot of fiscal supporting policies in order to stabilize our agent team to retain them. And a lot of measures are there in that countermeasure package. I won’t to elaborate on each of them. Just to say a few of them. You can see we take care of the special policy in Hubei, the epidemic striking area, and we also have some support over our agent nationwide. And some of the KPI over on their daily work are being loosen in order to stabilize our team during this special duration of the epidemic outbreak.

Second point, as shared by Jessica already, it’s technology empowerment. So going back to office, as you asked, we actually have started office activities online already. But of course, off-line, we have to obey the government policies. For online office and because we have Ping An technology expertise, we currently — the entire process can be done online including operation and business development. For instance, the meeting — all the morning meetings are happening online, 100% of them, using our own system, OA system. So the agents can work from home. And some agents called me today, they’re saying they’re getting busier working at home now having meetings in the morning and trainings. It’s busier than before. So morning meeting online and then training is also 100% online. The training attendance is very high.

And thirdly, the recruitment, we call mini recruit meeting, 100% online as well. And we have seen many attendees on those meetings recently. And fourthly, we — the explanation to the customers are also happening online because we have again the technology. So all the business activities can happen online. And the activity is even busier than before. And then our products can be signed online as well. All the products we sell can be signed online instead of doing it physically. So that is why we stand out from the other providers. And then like I said, we have financial support and we have technology empowerment. And among all the insurers in the world, I believe we are pretty much the most complete online service provider as a life insurer.

Like Mr. Ma said, life insurance product is sophisticated. You still sometimes need to rely on face-to-face, but I told my team online, you have to be diligent, because now you cannot see your customer in person, you have to be diligent online. And eventually, we will still enjoy great results and rewards. Like Ma said, we hope that we can go back to normal in the second half of the year. And then we will continue to reform our system and making sure everything is sustainable and healthy.

Jessica Tan

To add up a few things, [indiscernible] said — talked about the epidemic impact on life insurers. But in general, the financial industry is not that much impacted, but of course, there are impact. Like Mr. Lu said, the impact is mostly happening to life insurance. The other 2 things impacted are credit loans, that’s definitely true, because the reminder, repayment of reminder and defaults will happen especially with the SMEs. But in general, it’s still controllable. You’re seeing some — we have seen something in the first half of the year. And the second thing is the impact on investment, like Mr. Yao said, Jason Yao said, and mostly impacting the tertiary industry because our investment, 70% of the investment are fixed income. We are investing into medicine, health care infrastructures, which is — are not going to be very much impacted by the epidemic.

And then I want to talk about the opportunities for the mid to long term, especially for fintech, medical technology and smart cities. We believe there are huge opportunities. And in addition to health care, we’ve seen many education opportunities, and all the kids are attending class from home. And you also have a training or education for the grown-ups and K-12 trainings are happening online as we speak. And I think it’s improving by at least 50%. So that’s why I say there are opportunities for us for the mid to long term.

Jason Yao

For your second question of the operation variance. Previously, another analyst pointed it out and I want to elaborate on that a little bit. We know life insurance, health insurance, in general, we have seen the analyst — analyzing report, the residual margin release is stable, growing by 19.5%. One of the big variance you have noticed is the operation variance. In 2018, it’s CNY21.7 billion, and this year, it’s CNY10.4 billion. So there are a few reasons to that. Firstly, in 2019, the premium increase has slowed down. So the expense difference compared with previous years are shrinking. So last year, we also invested heavily in technology for our life insurance offerings. For instance, AI, recruitment, training and AI agent management. So that’s why the expenses has happened. And with the growing slowing down, the agent team, the performance, investment expenses are higher. So that’s why the expense difference has reduced.

And second point is the surrender rate. Yes, that’s true. Surrender ratio is a little higher compared with previous years. There are a few reasons to that as well. First is the product mix is being adjusted. In 2019, we sold more long-term protection products and plus saving combination products. And compared with the previous year, the short saving products, the long-PPP product and the 25-month ones, the persistence rate is lower because of the — for the short saving ones, will be only for three years, five years. Savings now product is 10 to 15 years. The persistence rate is going to be a little bit less than the short period product.

And second reason is that on the market, there are, we call it, value chain, some kind of a black market. They’re trying to hoax the customer to surrender the policy. We do see some organizations, especially some ones are targeting on us. So our monitoring team are trying to analyze it. We’re trying to stringent manage it in a better way in the future. Another reason for high surrender is last year, the agent team has been reduced. There are offline policy — the persistence ratio is lower normally. That is why surrender is higher than before. The positive impact is less now for operating variance, but we believe the trend will get better in the future because we have prepared for those situations. And in 2018, the operating variance is more than CNY20 billion. It’s very high in 2018. And in 2017, the operating variance is only CNY10 billion. So 2018 has been high for us. That is why we’ve seen a huge change in this year again.

And for operating variance, looking forward, I am still optimistic. By the end of last year, we had adjusted our assumptions, especially for the risk margin. For the surrender, we added risk margin pad. We added a pad in the future. The assumption is now more conservative. So the positive variance probability will be bigger in the future. So looking at in different ways, the life operating revenue is still based on the residual margin release. The release ratio will slow down because of the product in-force is big, but this growth will still be healthy and then we have new business coming back in the future. We believe we can still look forward to the life insurance profit in a healthy way. Thank you.

Sheng Ruisheng

I just want to thank all of you for attending this meeting. And I believe you have more questions, and our IR team will follow up on that. So we will try to answer your question in the future in different ways through conference call or through e-mail. That concludes today’s announcement meeting. Thank you very much.

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Pioneer Natural CEO calls on investors to divest in companies with high flaring By Reuters

By Jennifer Hiller

HOUSTON (Reuters) – The chief executive of Pioneer Natural Resources (NYSE:), Scott Sheffield, on Thursday called on energy investors to sell shares or pull funding from companies that have rates of flaring.

The practice of burning off natural gas produced alongside more profitable oil has become a top issue for investors, who are focused on sustainability measures and already are frustrated by a decade of poor financial returns in oil and gas. Flaring has surged with U.S. oil output, but can worsen climate change by releasing carbon dioxide.

If producers in the Permian Basin, the top U.S. shale field, cannot drop flaring rates below 2% of gas produced by the first half of next year, when new pipelines would have come online, Sheffield asked investors in public shares, bonds or private equity firms to “end up either not doing business or sell whatever you have in regard to that company.”

The idea, Sheffield said during an earnings call, came out of a late January workshop in Austin, Texas, coordinated between Columbia University and the University of Texas at Austin, which brought together producers, pipeline companies, policymakers, non-governmental organizations, academics and analysts to talk about Permian Basin flaring. The workshop was invitation-only, but Columbia plans to release a report on it.

Companies attending agreed to share best practices, better report data to state agencies in Texas and New Mexico and set flaring targets, Sheffield said.

“I think it’s important to remove that black eye on the Permian Basin going forward,” said Sheffield, who in November first called for companies to limit flaring.

Other executives that have spoken out against high flaring rates include Matt Gallagher, CEO of Parsley Energy and the head of Royal Dutch Shell’s Permian Basin operations, Amir Gerges, who said this month that the region needs “regulatory requirements that incentivize reduction in flaring.”

On Tuesday, one of Texas’ oil and gas regulators defended flaring rates, which average around 5% in the Permian but also released a report naming companies with the worst records and said he would hold public meetings on the topic.

Several Permian Basin producers reported financial results this week, including Concho Resources (NYSE:), which said it dropped its flaring rate to 1.6% last year from 3.6% in 2017.

“There’s a lot of push, obviously, on the industry and from within the industry to continue to move that number down,” Concho CEO Tim Leach said on Wednesday.

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Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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CareTrust REIT, Inc. (CTRE) CEO Greg Stapley on Q4 2019 Results – Earnings Call Transcript

CareTrust REIT, Inc. (NASDAQ:CTRE) Q4 2019 Earnings Conference Call February 21, 2020 1:00 PM ET

Company Participants

Lauren Beale – Controller

Greg Stapley – President and Chief Executive Officer

Dave Sedgwick – Chief Operating Officer

Mark Lamb – Chief Investment Officer

Bill Wagner – Chief Financial Officer

Conference Call Participants

Seth Canetto – Stifel

Jordan Sadler – KeyBanc Capital Markets

Steven Valiquette – Barclays

Michael Carroll – RBC Capital Markets

Connor Siversky – Berenberg

Todd Stender – Wells Fargo

John Kim – BMO Capital Markets


Well ladies and gentlemen, thank you for standing by. And welcome to the CareTrust REIT Fourth Quarter 2019 Earnings Conference Call. At this time, all participant lines are listen-only mode. After the speaker’s presentation, there’ll be a question and answer session. [Operator Instruction] Please be advised that this call may be recorded. [Operator Instruction]

I would now like to hand the conference over to Controller, Lauren Beale. Please go ahead.

Lauren Beale

Welcome to CareTrust REIT’s fourth quarter and year-end 2019 earnings call. Participants should be aware that this call is being recorded, and listeners are advised that any forward-looking statements made on today’s call are based on management’s current expectations, assumptions and beliefs about CareTrust business and the environment in which it operates.

These statements may include projections regarding future financial performance, dividends, acquisitions, investments, returns, financings and other matters, all of which are subject to risks and uncertainties that could cause actual results to materially differ from those expressed or implied here in.

Listeners should not place undue reliance on forward-looking statements and are encouraged to review CareTrust SEC filings for a more complete discussion of factors that could impact results, as well as any financial or other statistical information required by SEC Regulation G. Except as required by law CareTrust REIT and its affiliates do not undertake publicly update or revise any forward-looking statements where changes arise as a result if new information, future events, changing circumstances or for any other reason.

During the call, the Company will reference non-GAAP metrics, such as EBITDA, FFO and FAD or FAD and normalized EBITDA, FFO and FAD. When viewed together with GAAP results, the Company believes these measures can provide a more complete understanding of its business but cautions that they should not be relied upon to the exclusion of GAAP reports.

CareTrust yesterday filed its Form 10-K and a company and press release and its quarterly financial supplement, each of which can be accessed on the Investor Relations section of CareTrust website at A replay of this call will also be available on the website for a limited period.

Management on the call this morning, include Bill Wagner, Chief Financial Officer; Dave Sedgwick, Chief Operating Officer; Mark Lamb, Chief Investment Officer; and Eric Gillis, Director of Asset Management.

I will now turn the call over to Greg Stapley, CareTrust REIT’s Chairman and CEO.

Greg Stapley

Thanks, Lauren and good morning everyone. Thanks for being on the call with us today. 2019 gave CareTrust the opportunity to evolve and make changes that we believe position us well for the next phase of our growth. We do worry sometimes that the noise that we experienced in the second half of the year might mask the fact that 2019 was our biggest year ever for acquisitions with over $340 million in new investments made in the year that we’re very excited about.

More importantly and part of the reason, we’re excited is that we made them with outstanding operators who are doing a good job in those facilities. 2019 also required us, as I’ve alluded to, to face some hard realities as we looked across the portfolio. We are pleased to report that we’ve completed all of our previously announced portfolio changes, re-tenanting some facilities and disposing of others.

We also had one unexpected mortgage loan prepayment in the fourth quarter and we now anticipate another early repayment in the spring. The team will walk through those details in just a minute. The goal, as a reminder, of these efforts has been to rinse out any softness in our portfolio just to be sure that we always have a solid foundation to build on. Proceeds from dispositions and loan repayments are already being recycled in the more desirable assets with superior operators.

Naturally, until we fully deploy the additional capital, our revenues might run slightly behind where we were before the changes were undertaken, but we’re working hard to replace them as aggressively and responsibly as market conditions will allow. Our success in making these changes has reaffirmed our belief that principles of sound stewardship requires not only to grow and diversify earnestly, but to also prune the portfolio responsibly from time to time. It also reinforces our commitment to aggressively tackle small problems while they are still small.

To that end, we continue to monitor and interact with all of our tenants frequently. We believe the rigorous application of these operating philosophies will produce the best overall long-term results for CareTrust and our shareholders. In addition, we expect this approach to continue fostering an atmosphere of accountability and high performance both for us and our operating partners while helping us build a strong, healthy, and expanding organization that can stand the test of time.

With that, I’d like to turn sometime over to Dave to talk about the changes we’ve made in current operations; then, Mark will discuss recent acquisitions in the pipeline and Bill will wrap up with the financials and guidance. Dave?

Dave Sedgwick

Thanks, Craig and good morning. On our last call, I provided detailed color on the actions then under way to derisk the portfolio. With the exception of Metron in Michigan, all of those actions were completed in the quarter as I described. We are now watching the performance of the facilities we retained and repositioned closely and are encouraged by most of the progress to-date.

As a reminder, in Ohio, we moved four facilities from Trillium to our master lease with Providence; we recast Trios rent in their seven facilities; and we sold the remaining three Ohio assets to CommuniCare. Our Ohio facilities are now largely performing as expected with these operators. They still have ground to cover before we consider them stabilized, but we believe they are on the right path.

In our seniors housing segment, we replaced one operator with Noble Senior Services without any drop in rent given the incoming operators outlook for the portfolio. It’s still early, but we’re encouraged by some of the improvements we’ve seen to occupancy out of the gate. We’ll continue to monitor all of these tenants and their operations closely to be sure pro formas are consistently met and they are on their way to reaching their full potential.

Finally, with regards to Metron, I had said on last quarter’s call that we expected to sell the portfolio sometime in Q1 of this year. I’m pleased to report that we closed on the sale of all six facilities last Friday, February 14th for $36 million. In order to expedite the transaction, we provided short-term seller financing receiving roughly $3.5 million in cash at closing and carrying the balance at 7.5%.

We expect the mortgages will be paid off by March 31st. This quarter continues what we believe is the new gold standard for reporting with our top 10 tenant lease coverage slide in our supplemental. We’re showing you EBITDAR and EBITDARM coverage by tenant for approximately 84% of our annualized rental revenue. One quarter to the next does not make a trend, but with time, you’ll be able to have a stronger sense of how these operators are performing.

Looking at the broader industry, there are basically three areas of interest to us and our operators. First, PDPM; second CMS’s recent statement about Medicaid; and third, the impact of these things on deal flow, which I’ll let Mark discuss. First, regarding PDPM, it’s really too early from our perspective to make conclusions about PDPM’s impact on the industry as a whole. There is certainly anecdotal evidence that some providers have benefited from PDPM as expected with improved daily Medicare rates and lower therapy costs.

We’ve also heard others that have been hurt by it. So we’re frequently asked whether PDPM might significantly miss its budget neutrality target prompting a take back or other draconian change by CMS. We believe that PDPM’s change to set rates from patient characteristics rather than from therapy volume is a much better approach and will produce better outcomes and we applaud CMS’s efforts here. So even if the budget projections turn out to be a little bit off, we hope and expect that CMS will have the flexibility to thoroughly assess the impact before making adjustments, if any.

Second, we’ve also lately been asked quite a bit about CMS’s recent comments about their proposed Medicaid Fiscal Accountability Rule or MFAR. We believe that recent comments by CMS reassuring the industry that they have no plans to cut Medicaid payments or otherwise pull the rug out from under those states with supplemental payment systems should effectively allay fears of a significant impact in the near-term. We don’t expect the conversation to go away however and we’ll be tracking the discussion as it affects the states where we have assets.

And with that, I’ll hand it over to Mark to talk about the pipeline.


Mark Lamb

Thanks, Dave and hello everyone. In Q4 and since, we have closed approximately $48.5 million in new investments. This includes a 70-bed skilled nursing facility located in Modesto, California for which we paid $8.7 million and a 99-bed SNF and 72-unit assisted living facility campus in Sacramento that we picked up for $14.2 million, both of which have been leased to our existing tenant, Kalesta Healthcare.

Scheduled cash rent for the first two years of approximately $3.9 million has been added to Kalesta’s master lease with us and both facilities are performing ahead of expectations. We deployed $18.5 million to acquire Cascadia of Boise, a brand new state-of-the-art 99-bed skilled nursing facility located across the street from Saint Alphonsus Medical Center in Boise, Idaho, adding $1.67 million in new rent to our master lease with Cascadia Healthcare.

You may recall that we jointly developed this asset with Cascadia under a preferred equity financing arrangement, which allowed us to get the property at an advantageous price while allowing them to lease it from us at a rent that was below market for a new asset of this quality. This was our second new build with the Cascadia team and we look forward to more new construction with them in the near future.

Lastly, we just acquired Barton Creek Assisted Living, a 62-unit memory care facility located on the campus of Lakeview Hospital in Bountiful, Utah. We leased Barton Creek to our outstanding existing senior housing tenant, Bayshire Senior Communities adding just under $600,000 in rental revenue to their master lease with us.

We look forward to further growth with Bayshire are as well. The numbers quoted for all these deals were inclusive of transaction costs and the initial cash yields are all disclosed in our supplemental. Our total investments for 2019 exceeded $340 million, which was our best year ever, all at a blended yield of 8.8%.

Turning to the market, we’ve seen it heat up a bit over the last few weeks but prior to that, it was very slow especially on the SNF side. As Dave mentioned, we suspect that some SNF operators who might otherwise be sellers have been on the sidelines waiting to see how PDPM might shake out.

We believe this is a temporary phenomenon but it might be making deal flow a bit lighter at present. It certainly makes valuation of the deals we do seem a bit more complicated in the short run, but we are working through that and we have no reason not to expect to get our fair share of acquisitions this year.

On the senior housing side, there are plenty of assisted living and memory care deals out there right now, but most don’t fit with our or our operators objectives. So meaningful opportunities for us in that asset class have been fewer and farther between, but we are getting a few as you just saw with the Barton Creek deal, which we are very excited about.

The pipeline as we sit here today is right around $150 million. They consist of a few singles and a few small to mid-sized portfolios. We anticipate placing a majority of the buildings with our existing operating partners, but we anticipate bringing some new relationships into the CareTrust family as a result of these opportunities in the pipe, operators who we know very well and have had substantive conversations with over the past few years.

Please remember that when we quote our pipe, we only quote deals that we are actively pursuing which meet the yield coverage and other underwriting standards we have in place from time to time and then only if we have a reasonable level of confidence that we can lock them up in closing.

Now, I’ll turn it over to Bill to discuss the financials.

Bill Wagner

Thanks Mark. For the quarter, normalized FFO grew by 20% over the prior year quarter to $32.5 million or $0.34 per share and normalized FAD grew by 22% to $34.1 million or $0.36 per share. Our payout ratio remains at or among the lowest of our peers at approximately 66% on normalized FFO and 63% on normalized FAD.

Leverage continues to be at all-time lows at a net debt-to-normalized EBITDA ratio of 3.3 times and a net debt to enterprise value of 21% as of quarter-end. Updated guidance for 2020, we expect normalized FFO per share of $1.32 to $1.34 and normalized FAD per share of $1.38 to $1.40.

This guidance includes all investments and dispositions made to-date, expected loan payoffs in Q1 of approximately $32 million, the sale of our one remaining independent living facility in Q1, a diluted weighted average share count of 95.6 million shares, and also relies on the following assumptions.

One, no additional investments or dispositions other than the ones I mentioned nor any further debt or equity issuances this year; two, inflation-based rent escalations, which account for almost all of our escalators at an average of 1.75%; our total rental revenues for the year again including only acquisitions made to-date are projected at approximately $167 million, which includes $77,000 of straight-line rent.

Lastly, not included in this amount are tenant reimbursements which we previously accounted for on their own line item in the income statement. Due to the new leasing standard, this is now grouped with rental revenues. Three, interest income of approximately $1.3 million, this is down $2.5 million due to an unexpected loan pay-off in Q4 of last year as well as the now expected payoff of the loan we made to CommuniCare when we sold them three Ohio assets.

This decrease was slightly offset by the short-term loan we made in conjunction with the sale of our Michigan assets. Four, interest expense of approximately $26 million. In our calculations, we have assumed a LIBOR rate of 1.75% and a grid-based margin rate of 125 bps on the revolver and 150 bps on the seven-year term loan. Interest expense also includes roughly $2 million of amortization of deferred financing fees.

And five, we are projecting G&A of approximately $13.9 million to $15.8 million. Our G&A projection also includes roughly $3.7 million of amortization of stock comp. This range is up approximately $2 million on both the low and the high-end from our previous guidance due to expected new hires we intend to make to strengthen our team and increased wages and stock comp.

Our leverage and liquidity positions continue to remain strong. We did not sell any shares under our $300 million ATM that we put up last year and our revolver balance currently sits at $75 million. So, our credit stats calculated on a run rate basis as of today are net debt to EBITDA of approximately 3.6 times, leverage is about 20% of enterprise value, and our fixed charge coverage ratio is approximately 6.4 times.

We also have $12 million of cash on hand. Finally, you’ll notice that we put back into our Q4 supplemental the portfolio performance by asset type based on all the feedback we received since we last took it out.

And with that, I’ll turn it back to Greg.

Greg Stapley

Thanks, Bill. There is one more bit of news we’d like to share with you before we open up for questions today. While our first priority will always be the creation of long-term value for shareholders, we believe that sustainable development practices and consistent attention to social and governance priorities can help enhance that value over time.

We’re pleased to report that yesterday we published a number of policy statements covering corporate responsibility. While many of these statements seem to memorialize our existing practices and philosophies, the exercise has given us the opportunity to get these core values on paper and share them both internally and externally.

Among other things, we’ve updated our internal code of conduct and business ethics. We’ve also crafted a vendor code of business ethics and we’ll soon begin distributing it to every vendor with whom we have a material relationship. We likewise have memorialized our positions or policies on human rights, human capital, and environmental responsibility.

One of the more unique policies is our new tenant code of conduct and corporate responsibility. It creates a model for a new kind of responsible partnership between triple net landlords and tenants. We believe it is a first of its kind document for a fully triple net non-shop non-RIDEA REIT.

Our hope is that this partnership approach will allow us and our triple net tenants to make cooperatively the kinds of positive changes that landlords who have full control over their properties can make unilaterally. We also hope that it may actually distinguish us as a more attractive capital partner for prospective tenants in the future. This will be an ongoing project and actually implementing that program and procuring buying from tenants will take some time.

So going forward, we will be working on a periodic reporting pattern that our stakeholders can look to in order to gauge our continued progress on this front and all of these policies can be found on the Investors section of our website. We hope that this discussion has been helpful to you. We thank you again for your continued interest and support and with that, we’ll be happy to answer questions. Michelle?

Question-and-Answer Session


[Operator Instructions] Our first question comes from Chad Vanacore of Stifel. Your line is open.

Seth Canetto

This is Seth Canetto on for Chad. Hey in your opening commentary you mentioned MFAR, the Medicaid Fiscal Accountability Rule. Can you just tell us how much of that revenue in your existing portfolio could be impacted by that and I think it impacts Texas, Utah, Indiana?

Greg Stapley

Yes, so MFAR is — yes, at this point, we’ve seen really unified opposition from hospitals and insurers and everyone even bipartisan opposition from governors to senators to the rule as it’s been written. The public comment period closed on January 31st and CMS now has about 4,000 comments to go through before they decide whether to finalize the rule or change it. We don’t expect that there will be significant impact based on everything we’ve read so far.

There is basically the provider taxes methodology, which is largely employed by almost all of the states. If there is a problem that CMS has with a particular state’s criteria, they’re going to have time to change how they do things to show that there is quality outcomes as part of the measurement or whatever CMS is looking for. So we don’t expect that to go away. I think the UPL component has probably been the one that’s the most largely at risk.

But again, there is going to be a period of several years for these operators and states to work out something or transition to something else away from UPL to something else to protect that revenue. The Medicaid revenue as you know in skilled nursing is just not rich enough to cut. Medicaid knows that. They’ve signaled that they’re not — their intention is not to cut the Medicaid funding from this and so we think it’s really an attempt for transparency and accountability that CMS wants to see.

So we’re not really projecting or giving out any guidance or numbers as to a threat to their cut in revenue that we don’t expect.

Seth Canetto

Okay, great, that’s very helpful, but does it impact your underwriting of potential acquisitions in certain states?

Mark Lamb

Hey, Seth, it’s Mark. I think if you look at states that are affected by UPL, you have states like Texas, which is — kind of have something called QIPP and we don’t underwrite QIPP into our new acquisitions. So I think other states that it’s a little bit more embedded, say maybe Idaho or Montana. In there, we’re very careful in terms of how we use that revenue stream and how we value that revenue stream, but like most of our peers, we don’t ever UPL as we look to acquire assets.

Seth Canetto

Okay, perfect and then just shifting to the top 10 operators in your portfolio. I think it was welcome that you guys provided the coverage metrics for those, but if I look at it, it seems like most of the operators are flat to slightly up, which is great, but the two that jumped out to me were the Providence Group coverage and the Premier.

I know we talked last quarter that you mentioned Premier has one building in particular that’s causing a temporary drag on their coverage, but is there anything else meaningful that’s dragging down that operator and then should we expect Providence Group’s coverage to rebound from PDPM?

Greg Stapley

So with regards to Premier, the story there really hasn’t changed from last quarter. So we would expect to see coverage start to stabilize here in 2020 as those regulatory challenges that they had were kind of throughout 2019 for the majority of the year. So, you’re probably not going to start to see that until we start to see Q1 numbers come in, which you are not going to see until Q2 and then with regards to Providence.

Yes, the dip there is really simply ties to the addition of Ohio portfolio that they stepped into. That dragged their coverage down and they will take their time to stabilize that part. The buildings are doing as they expected when you take over some underperforming assets, it takes a little bit of time to get those things stabilized and so we’re not concerned about that. We think that that’s going to eventually in 2020 start to show better coverage.


Our next question comes from Jordan Sadler of KeyBanc Capital Markets. Your line is open.

Jordan Sadler

I just wanted to follow up on the coverage. I guess I saw a little differently sequentially. I know this has been outside of sort of end time that will see that sequential softening, but I know that it’s only through 3Q. I’m just kind of curious in terms of the expectations as we roll forward. Will the recent trends be sustained or do you think ultimately there’ll be a reversal either following reimbursement or just as a result of sort of the individual business plans of some of the operators that you signed on over the years.

Greg Stapley

Well, Jordan, I’d say each of these operators has their own unique story and hard to paint a broad brush overall the top 10 tenants. So I guess what we could say is that — what I would expect if I were you is to see coverage kind of go up and down slightly from quarter to quarter for a whole host of reasons that operators have good quarters and then some challenges. So we don’t expect to draw much in terms of the conclusion from one quarter to the next, but as you string four or five quarters together, you can really see how these guys are performing.

Jordan Sadler

Okay and then as it relates to the pipeline, Dave, I guess while I have you or maybe Mark wants to jump in, what is the expectation in terms of timing based on sort of your commentary about what we’re seeing in the fourth quarter and sort of expectations potentially of sellers versus you know, of you guys and other buyers in the first half of this year.

Dave Sedgwick

Yes, so I think you can bifurcate. There is a lot of senior housing and assisted living out on the market. So you know, I obviously stated that in the prepared remarks. On the SNF side, we have seen an uptick over the last couple of weeks in the pipeline. Not sure if that’s operators coming off the sidelines from PDPM they’ve kind of seen enough and they are ready to sell or if folks were just looking to get pieces of their portfolio fixed.

So we’re a little bit unsure as to why the uptick has taken place, but we are encouraged by the deal flow that has come in of late and we obviously head to the NIC in two weeks and would expect to see additional deals there. So we’re cautiously optimistic that we’re going to start to see kind of more normalized flow in skilled nursing deals that we’ve seen in the past,

Greg Stapley

Jordan, it’s Greg. Let me just add that — and we’ve already indicated that the latter part of last year, the deal flow felt kind of light and so as the pipeline just starts to refill now, you can probably anticipate that the acquisition volume will probably be loaded toward the middle and back of the year more heavily at this point assuming that what we’re seeing right now holds.

Jordan Sadler

Can you characterize the uptick? Is it many individual or like one-off and one-in-two-off sort of properties that is coming to market over the last year-to-date or is has it been a couple of portfolios that have come to market.

Greg Stapley

Yes, I think — that’s all. So it’s continued divestitures of non-strategic assets for regional operators. It’s maybe a mom or pop that are looking to exit and then you have small to mid-sized portfolios of say four to 10 assets that you have groups that are looking to get out altogether, so it’s not, it’s not. I think obviously cap rates are what they are, particularly in certain regions California, the Southeast, the Mid-Atlantic still are very, very competitive from a geographic perspective, but there is not, it’s not like a flood of mom and pops or it’s not a flood of say traditionally Medicaid operators. It’s really kind of a catch-all of people paring down their portfolios and then some people just getting out of the business.


Our next question comes from Steven Valiquette of Barclays. Your line is open.

Steven Valiquette

Thanks, good morning everybody on the West Coast. So, two questions here. First, this one is kind of long-winded, so I apologize in advance, but just your comments around PDPM were helpful and just a quick follow-up question on that topic is really just given the timing each year of when proposed rate updates come out, let’s say, around May 1st each year for proposed rates and final rates published around August 1st. My personal view is that there was probably only a small chance that CMS would have enough data to really make any sort of well-informed decision around hitting versus missing budget neutrality targets to change SNF Medicare reimbursement for fiscal ’21 related to PDPM. So I guess the question is, whatever the revenue and profit trends are for SNF operators in the first six months around PDPM, do you and or industry insiders in general think it was realistic that CMS would make any quick adjustments to SNF reimbursement for fiscal 2021 over the next six months or so or would they more likely want to see, one to two years of financial trend to make an adjustment for maybe fiscal ’22 at the earliest. Hopefully, that question makes sense.

Greg Stapley

Yes, it does. We think it’s more likely that they would not be making a big decision based on the limited information they’ve received so far. So we agree with you there. We think Mark Parkinson recently, Head of ACA, has basically suggested the same. So we would be surprised if they made a major change later on this late summer, early fall. However, there is precedent for being surprised by CMS and so you can’t sleep on it but the short answer is yes, we agree that it would be surprising based on the limited information that they have so far to make big changes.

Steven Valiquette

Okay, that’s helpful and then just a follow-up quickly on that last line of discussion around SNF transaction flow overall across the industry. There was another large healthcare REIT company that talked about today’s skilled nursing market, pricing is so hot, they’d rather be a seller instead of a buyer. I don’t know if that was a comment that you caught or not, but just curious if you want to comment further on if other operators have that view, how you kind of think along those lines? Not an operator, but another REIT just to be clear, sorry about that.

Greg Stapley

Yes, Steve, it’s Greg. I think that’s an interesting comment. All of our leases — all of our properties are subject to long-term leases and if we had a tenant who was actually doing so well that the property was — could go out and command a super high price, we’d have to not only probably split any gain on a sale with them just to pay them to terminate their lease, but we have to give up a very good lease with very good coverage.

So we would not be sellers of good assets in this market, the kind that would command those kind of premiums and — but on the other side, it sure is making it challenging to find assets that we can get into at the right price. We’re getting them, but it is hard work and requires us to be out there beating bushes pretty hard. So the $340 million that we did last year in acquisitions, which was predominantly SNFs was significant for us and we hope that we can replicate that or something like it this year.


Our next question comes from Michael Carroll of RBC Capital Markets. Your line is open.

Michael Carroll

Yes. Thanks, Greg, I wanted to touch on, I guess in the earnings release, you kind of highlighted that there are a few tenants still on your watch list. Can you provide some color to that and how should we think about that? How big are those tenants and why are they on your watch list?

Greg Stapley

I think I characterized them as smaller tenants, Mike and we said in the past and I know it’s probably not appreciated, but we said in the past that everybody is on our watch list, but I know what you’re asking and we do stay close to them and — but there are a couple of tenants, they are the obvious ones, I mean you can look at the top 10 list and see a couple of depressed coverages there that have been on our watch list for a while. Dave’s already talked about what the prospects for those two tenants are.

In the non-top 10, we’re still watching — like the new tenant that we just brought in, they’re doing a great job and — but that’s still a very fresh relationship and so we tend to stay closer to it, but beyond that, I mean, the portfolio is pretty stable and things are going fairly well. Even the ones that you see there up in the top 10 list, there is a very good reason why Providence is depressed as Dave described, Let’s Larry in some turnarounds into their coverage and that was basically one month, it was only September, they took over September 1st in those three Ohio assets.

So their coverage you might see going forward when the fourth quarter drops in could be even a little bit lower, but it’s really not cause for alarm because the rest of the portfolio is doing fine and it is just the effects of a full quarter in those three assets on the overall number and then Premier we still really like those guys.

We’re happy that the regulatory issues that we described to you before seem to be behind them now and it will take a little while for that coverage to pop back up because as you know. we report coverage on a quarter lag, but it is onward and upward for them right now, we’re cautiously optimistic, but staying super close to them and every little thing that they’re doing which we can’t direct, but we can sure monitor closely for progress and to be sure there is no further cause for concern there. Is that helpful?

Michael Carroll

It is. So I guess — just want to make sure I understand. So there is nothing new that you’re tracking necessarily, it’s just tenants that have tight coverage or recently transitioned that you’re staying close to, but not necessarily expecting any type of problems here in the near-term?

Greg Stapley


Michael Carroll

Okay, great. And then, Bill, can you talk a little bit about the guidance change and I picked up I guess your G&A is up $0.02 for expected hirings. Can you talk a little bit about that. Who do you plan on hiring? It seems to be a pretty big tick up in G&A. Is this a senior person or is it just multiple lower level people to keep up with the growth?

Greg Stapley

Hey, I’m going to take that one. Mike. We — I don’t think it was full $0.02 for new hiring. There is some additional comp in there that’s starting to flow in — stock comp and other things that’s impacting that, but we’ve — if nothing else, we hope we’re a learning organization and as we’ve progressed through some of the challenges that we had in the latter half of last year, we’ve come to realize that we are going to have to evolve a bit in order to prepare for the next five years.

So we’ve run this thing kind of on a shoestring with a skeleton crew for a while and it’s just going to take a little bit more going forward as we mature. So we are going to be changing some of Eric’s role and he’s been our Director of Asset Management and portfolio management and tenant relations and he’s been wearing a lot of hats and we actually want to expand what Eric is doing for us which means that we need to come back and backfill with some additional strength on the asset management side.

So we are going to be out here in the near-term looking for help in asset management and we expect that to be a fairly senior level person or people to help us sort of get to where we really want to be as a growing REIT.

Michael Carroll

Okay, great, thanks for that, Greg. And then just last question for me is — did you disclose the expected loan payment that you plan on receiving in spring. I mean, how big is that and is there a specific operator that it relates to?

Bill Wagner

Hey Mike, it’s Bill. Yes, that loan relates to the three properties we sold to CommuniCare. We now expect their financing to come through a lot sooner than what we had previously anticipated and that’s really two loans. It’s a mortgage loan as well as a working capital loan and they total about $32 million and now we expect to get them just after Q1.


Our next question comes from Connor Siversky of Berenberg. Your line is open.

Connor Siversky

Hi guys, thanks for having me on the call. Just a quick question on the property you picked up in Utah. Could you just touch on some of the market dynamics there, maybe what you like, what you don’t like and if there is somewhere you’d be looking to expand the portfolio in the future?

Mark Lamb

Yes, this is Mark. I think in that particular part of Salt Lake City, just north of Salt Lake City, one — this facility is located on-campus of a hospital. There is a Class A brand new build that is kind of attracting a different type of customer and the property that we picked up is I would say kind of A minus, B plus and is going to be a little bit more affordable, great physical plant, great location with respect to amenities and the ancillary services and just allows our operator who had a desire to grow his footprint up into Utah.

We’ve seen opportunities up there in the past and just haven’t been able to to pair the asset with an operator that we liked and so in this instance, the stars somewhat aligned and our operator really felt like he could bring his model of working closely with health systems and insurance companies as well as obviously the private pay patients that were already there inside that facility. So he felt like he could bring his model that he is proving out here in Southern California and can expand it to Utah.

Connor Siversky

All right, thanks for that and then just a little more general skilled nursing, the certificate of new laws, are you seeing any plans or maybe any narrative of relaxation laws in any particular states?

Mark Lamb

No, not — I think there had been talks about in Texas, they were handing out bed licenses and bed rights maybe a year, year and a half ago a little too easily. We’ve seen that kind of pare back a little bit. There is some discussion last year when the legislative session was open that maybe they would put some sort of stay on the ability for developers to attain bed rights, but that obviously didn’t even make it to the floor. So I would say that’s probably the last — those were the last whispers that we have heard in the states that we know well, but no other discussions that we’ve heard of.

Connor Siversky

Okay, thanks and one last one from me, looking at 2019 investments, blended yield of 8.8%. Are you comfortable at that level, would you go any lower. Just kind of provide some kind of color going forward.

Greg Stapley

Yes, this is Greg. You know it’s interesting we were just having a conversation about that yesterday and wondering if the lower cap rates demands that we’re seeing from sellers are sort of becoming a new normal. I don’t think it is, but it might be a little too early to tell. So look, what we’ve said recently and still believe is that while yields are important, coverage is more important and so we’ve increasingly placed a stronger emphasis on coverage going into the deals that we’ve been going into lately and if that means that we give up some yield and go below 9%, below 8.8% to get that, we’re comfortable with that. Our cost of capital has been steadily ratcheting down over the past couple of years and we can still feel pretty good about our ability to get the spreads that we want, even at lower cap rates and the higher coverages.


Our next question comes from Todd Stender with Wells Fargo. Your line is open.

Todd Stender

Hi, thanks. And then Greg, kind of in that theme of coverage, with the newly built Cascadia of Boise, to make that financial commitment a couple of years ago, you obviously had some underwriting and some coverage assumptions, how does that play out compared to maybe what you’d underwrite it today.

Greg Stapley

I’m going to let Mark take that one, Todd.

Mark Lamb

I think it’s — there’s obviously — the building was still maturing I think when we closed on it. The occupancy was probably low 70s. Skilled mix was I think kind of mid-teens. So we expect probably on the skilled mix side to that will level out probably in the mid to high-20s and occupancy, we would expect to see probably in the high-80s, low-90s. So we feel like there is definitely some runway left for that asset.

Cascadia’s overall portfolio coverage is very, very strong. So we’re not — we actually triggered the option, call it a little bit earlier because our coverage was so good and that allowed them to kind of keep rents at numbers that they felt like were manageable, but then also felt like our coverage still had room to run. So I think it will be interesting when that asset levels out. We would expect it to be well north of 1.5.

Todd Stender

All right, that’s helpful and then, not sure if I missed this, with the Priority Life Care transition to Noble, we see a lot of transitions just with operators getting swapped out and this one, it sounds like the way you guys describe it no rent leakage, but certainly there’s a lot of mechanics behind this. Can you speak to Noble? Can you speak to what triggered the transition and then maybe any financial or CapEx commitment you’re making to the facilities?

Mark Lamb

Well, sure, what triggered the transition was a conversation last year with the outgoing operator, Priority Life Care about their outlook for the facilities and their strategic decision as a company to want to focus more on kind of the consulting and management fee business as opposed to owning the operations outright. We took that opportunity to look for a new operator and found Noble and we’ve been really pleased with them. We’ve committed some CapEx dollars to these facilities and will help them to reach their goals of maximizing the census potential that’s there. It was kind of a story of an operator that is switching their strategy and at the same time finding another operator who’s strategy really fits these buildings perfectly well and so we’re able to make that change.

Todd Stender

All right, that’s helpful. And just last one, the seller financing that you’re providing for Metron. The loan payoff period seems pretty tight. They have to pay it back by the end of March. I assume they’re not getting HUD financing that takes forever, but what kind of the access to capital do they have and if they don’t pay it off on time, what are some of the assumptions there?

Mark Lamb

Yes, so they’re going to be pursuing a bridge to HUD financing and really the only reason we stepped into to do the seller financing like we did is because a couple of things. It really brought certainty to the transaction as soon as humanly possible after the State of Michigan approved the CON and the licensing would be approved.

So we wanted to — as soon as we got that approval, we wanted to be able to close just to bring certainty and closure to the deal and it provides us with a little bit more income as we will be able to get interest income for the second half of February and all of March that we wouldn’t have gotten otherwise. So that’s really what was behind it, it is just being able to bring this transaction which had started — which is a lengthy process, particularly with all of

The dynamics involved with this operator and in Michigan to an end.


[Operator Instructions] Our next question comes from John Kim of BMO Capital Markets. Your line is open.

John Kim

Thanks, good morning. I was wondering if you could comment on Premier and its ability to stay current on rents. It looks like your assets with them represent almost half of their managed communities and I know you expect some stabilization, but I was just wondering about their financial stability.

Mark Lamb

I’m sure that we can say much more than the color we have given last quarter and on this call today. Their current — we’ve got personal guarantees. They are performing better today than they had in the quarters that you’re looking at on the coverage slide. So we don’t have any reason to believe that they won’t be able to continue to pay the rent.

John Kim

I think Bill you mentioned on an earlier answer to your question about the CommuiCare loan being paid down early, but I thought you mentioned on the last call that you expected that to be paid out in March. So I just wanted to clarify that statement.

Bill Wagner

On the last call I had that CommuniCare loan being paid off later in 2020 than what I have in this round of guidance. So if I misstated, then I apologize. I don’t think I did though.

John Kim

I wasn’t sure if it was that or if it was related to the Trillium financings. So I’m not sure if that’s the same assets.

Bill Wagner

No, both the loans, the loan that got paid off in Q4 as well as this CommuniCare loan I had extended in the back half, I had being paid off in the back half of 2020. I mean that’s accounting for about $2.4 million to $2.5 million of change from last quarter to this quarter in the guidance.

John Kim

Have you utilized the ATM in January?

Bill Wagner

No, we have not.

John Kim

Is there anything we should read into that just the lack of utilization both at the fourth quarter and this year as far as the potential timing of acquisitions.

Bill Wagner

I wouldn’t read into it. I mean, our net debt to EBITDA is at an all-time low. Interest rates are at an all-time low to use a little — to run the line out a little bit seems practical to me, but again the ATM is another great tool in our toolbox.

Greg Stapley

Yes, John, it’s Greg. I would just add that, you know, we’ve always viewed the ATM as a perfect vehicle for match funding our acquisitions, but if you look at what’s happened, we’ve had some acquisitions in the past four months, but we’ve also had the loan repayments and the sale of Metron coming and just felt like we didn’t really need to turn the thing on because we were going to have the capital to redeploy. So that’s really the whole story right there.

John Kim

So as far as acquisition volume on a net basis this year, do you think it’s going to be closer to $340 million like you did last year or $112 million like the prior year.

Bill Wagner

We be sure hope so. I mean it’s so hard to make a prediction like that, John, because you can have a pipeline that’s $340 million and I think that you’re going to close most of it and then for some reason you only closed a little of it. So we will announce those deals as they come. We certainly have our own hopes and goals but it is definitely a tough environment out there. Tough — it’s a bit of a seller’s market and PDPM creates sort of a complication or overhang on valuations and we’re just working through all that, but as we said in our prepared remarks, we do believe that we will get our fair share of the transaction volume.


There are no further questions. I’d like to turn the call back over to Greg Stapley for any closing remarks.

Greg Stapley

Thanks everybody. We really appreciate you being on the call today and if you have additional questions, you know where to find us. We’re always open to talk. We’ll be out and about over the next few months at several conferences — investor conferences and other things. So we look forward to seeing you. Take care.


Ladies and gentlemen, this concludes today’s conference call. Thank you for participating and you may now disconnect. Everyone have a great day.

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