G8 Education Limited (GEM) Earnings Call Transcript & Summary

Good afternoon, everyone, and thanks for joining us today. My name is Gary Carroll, and I'm the CEO of G8 Education. I'm joined today by Sharyn Williams, our Group CFO; Robert Dawkins, our Chief Property Officer; and [ John O'Meara ], our General Manager of Strategy. By way of background, given the revised approach to greenfield investments and the transition to reporting on a statutory basis, we've flagged at our recent AGM, and an update would be delivered to give investors and analysts, further visibility on how performance of the greenfield portfolio will be reported. Today, we'll walk through the greenfield approach and reporting presentation that was posted on the ASX earlier today and then provide time for questions. This presentation will cover a review of the historical greenfield centers' performance, the revised approach to the greenfield portfolio and the rationale for that change as well as the resulting impact on how we will report the performance of greenfield centers going forward. An element of the group's strategy to deliver sustainable, profitable growth is the measured rollout of new greenfield centers. And here, we define a greenfield center as a newly constructed center that will be opened for the first time as opposed to a brownfield center, which is an existing, already occupied and operational center. The legacy greenfield program has informed a refreshed greenfield approach designed to progressively enhance the network and realize measured profitable growth. Encouragingly, 70% of the legacy greenfield centers have reached or are expected to reach a return on investment of over 20%. Under the refreshed approach, a deliberate number of new greenfield centers will be opened each year in attractive and targeted locations and partners with quality -- partnerships with quality developers in a capital-lite manner. Opening new centers involves engagement with quality property development partners in the preferred location and property designs. A small group of dedicated G8 team members focus on fitting out the in-center educational resources, recruiting the new team, marketing to potential new families and welcoming these families and their children when the center opens. Properly executed, greenfield growth improves the operational quality and financial returns from our center network. The benefits include the ability to select an ideal location, design a center that's both appealing and functional and negotiate appropriate commercial lease arrangements. Clearly, the flip side to this is that we have to recruit and train a new team ahead of the center opening and build family bookings from a 0 base. This means that the center will incur start-up losses until it builds sufficient occupancy and revenue. Now this concept of greenfield centers is not new to the group, with a pipeline of 44 greenfield centers undertaken from 2016 and completed in 2020 at a capital cost of circa $145 million, with this capital outlay being determined on a multiple of forecast earnings. Reviewing the performance of this prior cohort of centers was a critical part of forming the future approach to our greenfield centers. To that end, Slide 6 of your pack outlines the performance of these 44 centers from an occupancy, EBIT and return on investment perspective. The table to the left on Slide 6 outlines the number of centers by cohort year, the average occupancy, the CY '20 EBIT on a pre-AASB 16 basis and the ROI based on the acquisition price for those centers. The 13 greenfield centers that were impaired during the 2020 year are identified as a separate cohort. As a broad overview, as I've mentioned, 70% of the greenfield centers have performed very well with the 2017 and 2018 centers at occupancy levels above the target of 80% and delivering returns on capital of 21% and 30%, respectively. The 2019 centers have been opened for over 18 months and are profitable with an average occupancy of 74% and a maturing ROI of 7%. The 2020 centers, given their shorter trading period to date, with most of this time being impacted by COVID, are at an occupancy of 40% and have incurred start-up losses of $1.5 million. Pleasingly, despite this, these centers are operating near the trend line for their age and are considered to be on track with expectations given the operating environment over the past 12 months. The graph to the right on Slide 6 is a view of occupancy for the 44 centers for the year ended 31 December 2020, with an occupancy trend line for the group of centers. As you can see, as the number of months since opening increases, theoretically, so should the occupancy as center grows in its [ tenancies ]. The centers that have been impaired were either situated in challenging locations such as industrial business parks or were very large centers over 180 places, which proved challenging to achieve the occupancy necessary to achieve an acceptable margin on the fixed operating costs, including rental. The 13 impaired centers are the red dots on the chart. The underperformance of these centers is reflected in below-trend occupancy levels resulting in underperformance from an earnings perspective. Now there's been a number of learnings from the pipeline that the current leadership team inherited from 2016. These have informed and guided the revised greenfield approach, which is outlined on Slide 7. The objective of the greenfield center approach is to support measured and profitable growth of the center network by working with high-quality partners to develop a deliberate number of centers each year in attractive locations in a capital-lite manner. And there are 3 key priorities to support this process, including, firstly, a robust assessment of location; secondly, an optimal new center opening process; and lastly, strong support to the center at and after opening. Turning to the robust assessment of location. This involves a review of market demand elements from a myriad of angles to ensure that forecast supply-demand picture of the catchment area is positive and that the demographics are attractive. For example, the usage of early education and workforce participation being at an appropriate level. And enhancement to the previous process has been the extensive analysis of relative location within the market. The location appeal within a catchment is very important, specifically how that location compares in terms of relative competitors from a street appeal perspective as well as proximity to convenience-related factors such as schools and public transport. Rob Dawkins, our Chief Property Officer, and his team have deep experience in this area gathered from someone that looks so young but many years working in large distributed networks. And I've had first-hand experience of working with Rob for over 10 years and certainly expect to his track record. Development of the approvals for identified new sites incorporates input from relevant areas across the group, including the operations team, augmented by independent needs assessment from an external demographics consultant. The draft approvals are then considered by a working group of directors before being formally submitted to the full Board for approval. G8's location analysis has clearly determined that there are still pockets of attractive locations for new greenfield centers, providing a compelling opportunity for measured growth. The greenfield growth program will be balanced so as to not distract from the group's absolute priority to drive improved performance from the core center network. Part of the assessment process is providing material input into the design of the center. Further, it involves negotiating the lease arrangements, the contractual arrangements relating to the delivery schedule and the capital contribution by G8. And this is the area of the greenfield strategy that's seen very significant change. In the prior approach, a multiple of forecast earnings would be paid to the developer and a lease would be entered into with the landlord. Now G8 contributes a modest amount of capital, approximately $4,000 per license place, covering in-room educational resources and equipment and, at times, a minor contribution to the fit out such as the playground. This new approach results in the physical assets being recorded on the balance sheet in the form of a right-of-use asset relating to the lease. Importantly, there is no goodwill being paid for the greenfield centers under the revised approach. By way of comparison, the capital for the 44 legacy greenfield centers under our new model would have been $18 million to $22 million, a significantly lower capital contribution, meaning, ROI hurdles are able to be met at lower occupancy levels. In addition, because the expected earnings from the greenfield centers haven't changed, this leads to higher returns on capital invested in the centers. Robust assessment is the first priority area and provides the greenfield centers with the best opportunity to be successful. The second key priority area for success is optimizing the new center opening process. This includes management of the delivery schedule of the center, executing a structured workforce planning approach to ensure that the team has the right people in the right place at the right time and engaging the community in the market catchment to make them aware of and engage with the new center. The third priority area, driven from our previous learnings, relates to the level of support a new center requires at and after opening. An important part of welcoming families to the new center is having a center manager and team that are inducted well and trained in the G8 way prior to opening and knowing what to expect as occupancy builds. Our learnings have shown this is fundamental to retaining and attracting great team members as the center grows. The support model includes a dedicated recruitment officer, which, from a team perspective, is even more important in the current tight labor market that exists in the sector as well as a family liaison officer to ensure families' experiences are excellent at all stages of the process from inquiry to settling into the center. This direct operational support continues for up to 12 months as the center works through the occupancy ramp-up, the first enrollment and transition period and, potentially, the first assessment and rating process, and we use key metrics to objectively measure and optimize performance. These supporting roles manage multiple greenfield centers at one time to ensure the approach is cost efficient as well as being consistent across the portfolio of greenfield centers. Further, this structure allows for the quick capture and sharing of key learnings so that we can continuously improve the support provided to future new greenfield centers. I'll now hand over to Sharyn to provide an overview of the changes that will be implemented in relation to performance reporting for the group, including the measurement of greenfield portfolio performance.

Turning now to Slide 8, where the greenfield portfolio objectives and parameters are explored. The key objective is to provide transparency on the performance of greenfield centers that are still maturing by separating these from the core portfolio of mature centers. As a greenfield center reaches maturity, they are moved to the core and provide an additional element of measured growth for the group. The refreshed greenfield portfolio approach is expected to realize, on average, a broadly neutral earnings outcome. This reflects the dynamics of the growing earnings stream from centers approaching maturity, funding the start-up losses from newly opened centers. The greenfield portfolio earnings position may fluctuate between a modest profit or loss year-by-year, depending on the volume of new greenfields opened during a particular year. Containing the ramp-up performance in the greenfield portfolio quarantines this impact from the core portfolio. The greenfield portfolio will house all centers that are in the development phase. This enables investors to identify those centers that are maturing and also supports an internal operating framework of additional support and focus for these centers. The assessment of maturity will be based on centers that have reached an occupancy of 80% or above. When they are being mature, they are transferred to the core, so the focus remains on those centers that are still in the maturation phase. Based on past experience, it is anticipated that greenfield centers should be matured by year 3. In some situations, this can be much earlier. If a greenfield center has not reached the occupancy hurdle by the end of year 3, it will be assessed at that time for further opportunities to improve performance or potentially an exit maybe explored. The graph on the right outlines this concept relating to the current 31 greenfield centers that are operating. Most of these centers in year 3 have reached over 80% occupancy and 2 centers have not. So an assessment of these was done under this new methodology. Turning to Slide 10. The results are 16 centers have been transferred to the core, shown in gray on Slide 8. These centers are delivering EBIT on a pre-AASB 16 basis of $10.6 million and a return on investment of greater than 30%. Of these centers, 14 have reached maturity in over 80% and 2 have aged out, reflected on the graph with the 2 dots on the lower right. These 2 centers still generate profits of over $200,000 each despite lower than 80% occupancy and have been assessed to join the core, resulting in all 2017 greenfield centers graduating from the greenfield portfolio. This leads the remaining 15 centers, which are comprised of 2 2018 centers and all of the 2019 and 2020 centers. These are maturing as expected. This portfolio is breaking even with an occupancy of circa 60% and a positive ROI measured on a pre-AASB 16 basis. The statutory net profit before tax of these centers is lower at a $2 million loss, reflecting the very early stage of the lease life of these greenfield centers, and I will cover this in more detail in the following slides. During the 2021 year, new greenfield centers will be added to this cohort, and the group has signed agreements for 8 new greenfield centers. Our current visibility suggests that G8 will take possession of 4 greenfield centers by the end of the year, with one expected to open by year-end and 3 in early calendar year 2022 following completion of their fit-out and obtaining service approvals. The expected capital outflow per center is $400,000 to $500,000. And consistent with our turnaround program strategy, any savings on the previously projected $4 million of ramp-up losses will be reinvested in 2021 to drive quality across the core center network. We've also enhanced our reporting in relation to the performance of our greenfield portfolio reflected on Slides 11 and 12. Slide 11 outlines the approach to reporting occupancy for the greenfield centers, where each greenfield center's occupancy will be shown, along with metrics relating to the portfolio. This slide outlines the current 16 greenfield centers on the left and the core group occupancy on the right, which will be provided in lieu of like-for-like occupancy. Further occupancy tables will be provided relating to the core that investors are familiar with. From a financial reporting point of view, changes to the prior format of presenting operating performance have been made to enhance disclosure. Slide 12 outlines the approach to the refreshed view of reporting on operating performance. There are 2 drivers of this change. Firstly, the move from organic annual cohorts of greenfield centers, divested and impaired centers to a core and greenfield portfolio approach. The 472 centers currently reflected across these cohorts in the calendar year 2020 reporting are reclassified to core or greenfield as shown on Slide 13 and greater disclosure on license places and center numbers is provided. The previously impaired centers will form part of the core with additional information disclosed separately on a pre-AASB 16 basis to provide visibility of the run-off profile of this portfolio compared to the calendar year 2019 loss profile. In the prior reporting approach, the prior year's numbers were restated each reporting period based on movements of centers across cohorts. We appreciate that this caused challenges for modeling, so the new approach will freeze the cohorts at that point in time and prior year numbers will remain static. The second driver of the reporting change is the conversion from reporting operating performance on a pre-AASB 16 basis to a post basis, following 2 years of reporting both to allow investors time to transition their thinking and understanding of the leasing accounting standard. The impact of converting the reporting to a statutory or post-AASB 16 approach relates predominantly to the rental expense line to the group. You will recall that prior to the AASB 16 implementation, G8, like other businesses of large networks, had numerous operating leases that were not reflected on the balance sheet and was simply disclosed as lease expenses in the occupancy and other expenses lines of the P&L. Under AASB 16, this traditional rent expense is replaced by depreciation expense of the right-of-use assets and an interest expense calculated on the outstanding lease liability. The sum of the prior rental expense and the depreciation and interest that replaced this expense equal each other over time. However, depending on where a group is at in its lease profile, the timing of these expenses may change. This timing impact is driven by interest expense being higher in the earlier years of the lease and reducing over time and also the number of options now recognized and spread over the early years of the lease. This impact varies center by center. These changes result in higher EBIT because the rental expense is removed and replaced by only the depreciation portion. For this reason, the operating performance table will now focus on net profit before tax per centers rather than EBIT to ensure we capture all lease expense-related costs. In order to aid understanding in comparison, the depreciation and interest relating to leases, along with variable rentals, [ rental loan ] costs and modifications will be combined to form a proxy for a rental expense line. The centers themselves do not [ pay ] debt financing costs, so effectively for the centers, net profit before tax is equivalent to EBIT, besides the impact AASB 16 has on the timing of recognizing rental expenses. The resulting estimated impact on the operating performance table is outlined in Slide 13, where we have provided the existing approach, a reclassified version with the core and greenfield cohorts and then the conversion from pre-AASB 16 to the new format of statutory reporting to allow investors and analysts to revise modeling approaches to this refreshed approach. You will note from a center net profit before tax perspective, there is a reduction in 2020 calendar year of $4 million due to the impact of AASB 16, driven by rental expenses being brought forward. In 2021, this AASB impact is expected to be broadly neutral at the net profit line. We'll now take questions from people on the call.

[Operator Instructions] Your first question comes from John Hynd from Wilsons.

I was keen on perhaps some insights on the CY '18 cohort that seems to be the, I guess, the leading cohort on a number of metrics in terms of center investment, implied investment, ROI. What was the winning formula there? And can we expect you to apply that sort of approach going forward, noting '19 doesn't look like it's been as successful?

Yes. Thanks, John, and thanks for the question. For us, when we dissected the performance of the 2018 portfolio, it'd be safe to say more of that cohort had the relative location benefits that we've incorporated into our location assessment. So the overall market supply/demand was positive, and they tended to be in slightly better locations if we're comparing against the cohort peers. And for us, that was a bit of a validation of the approach we're looking to take moving forward. In terms of 2019, one of the drivers behind the ROI, because the occupancy is maturing quite nicely at 74%, we have -- we do have a number of those centers that are more higher cost in terms of -- both from a capital and an operating expense point of view. And again, we fed those learnings into our approach moving forward. So we've got a great degree of clarity of what we would accept in terms of rental expense as a percentage of revenue, and we've run that through various scenarios. And as you've seen, we've clearly moved on quite materially from a capital point of view.

Great. And I guess, looking forward, what do you think is the optimal center? Like what -- how are we going to see the G8 product be rolled out going forward? I mean can we -- can you talk to some of the products and the brands that you're running at the moment and center size, rates, locations, metro versus nonmetro, et cetera?

Yes. So if I attack a few of those, certainly, in terms of size, we've learned through the experience that larger isn't better. That sweet spot for us is probably 80 to 100 licensed places. We do find that, that works quite nicely. We do have hurdles around supply/demand from a future perspective. As you can appreciate, we have been sharing the exact details of that, but we've got very clear criteria that we apply. One of the other benefits that we've had through the change in approach and the change to higher-quality partners is more active involvement in the design of the centers. We feel that they're actually more functional and more appealing. We certainly look to take lessons learned as we work our way through different designs because they're not all the same design, and we would incorporate those learnings evolving moving forward to ensure that our products is appealing to our children and families. So they're probably the key differences we're looking at making in terms of making it sustainable.

And does that translate to one particular product we'd be familiar with, one of the brands? Or does -- do you continue with, I guess, what's suitable in a specific area?

No particular product or brand. We actually went through the exercise probably 18 months ago, where we've defined our G8 standard. And I won't embarrass Rob by asking how many of our developers -- previous developers got 100% mark on our standard because I think it will be a very low number based off what we've seen. So we would be comfortable saying none of our previous inherited pipeline would get 100% on our current standard. And we had the opportunity to influence that a lot more moving forward.

Okay. I guess what I was getting at was Greenwood is typically -- my understanding has typically been a bit more of a capital-intensive brand given the product that you offer. Is that still core? Or are we going back to previous brands?

We're not working with the developer that brought the Greenwood brand to us. And it would be safe to say our design differs a fair bit from what that was. We have a pretty clear view on what we think works, and a number of those centers had features that were very good, but also had some weaknesses in their overall design.

Your next question comes from Peter Drew from Carter Bar Securities.

Just a couple of questions. Firstly, just wondering, why are you using CY '20 EBIT to measure the return on investment? I just would have thought it's quite a difficult year.

Yes. It was a more difficult year, although the most current earnings. Largely, we thought it was a conservative way to measure the return, particularly where the 2019 centers, for example, using the earnings from that year, they would have been very young. So we tried to give the centers as much time to mature and show their performance in the earnings. So we took the latest, Peter.

Okay. And then just in terms of the impaired -- the treatment of the impaired centers, how do they get coming on the -- like if I look at Slide 13, when it says the Convert column, where are they reflected, the actual EBIT contribution?

The impaired centers form part of the core EBIT. So they are amongst those 457 centers.

And as Sharyn called out, we'll provide some commentary to give people a bit of additional flavor of what we're doing around the performance of those impaired centers.

Yes. Okay. And then just the last one, just in terms of, I guess, that impaired component, am I right in assuming that although those number of centers made up about 30% of the 44 centers that you -- of the greenfields over the past few years, it was more like about closer to 50% in terms of the dollars spent?

It's certainly true to say that they were larger centers and the capital would flow based on that, Peter. Absolutely. I think it's around -- it's in the high 60s in terms of the capital cost of those 13 centers.

[Operator Instructions] You now have a follow-up question from Peter Drew from Carter Bar Securities.

I guess just a question in terms of how much capital do you think you could spend on this new greenfield sort of approach on an annual basis?

Yes, it's a really good question. We're really clear, Peter, that we want to be measured in our approach for 2 reasons: one, there are multiple ways that we could invest our capital, and we don't want to put all of our eggs in one basket; and two, we're really clear that we've got some other very important strategic priorities that we don't want to distract the group from. So those natural constraints will limit the absolute number of deals that we will do in any particular year. And we flagged somewhere around 10 per year would probably be a pretty sensible number moving forward, taking those constraints into account. That would lead you to the capital number of around $5 million per year.

Yes. Okay. And I mean, I guess, a follow-up with that is notwithstanding maybe, like, a larger group capital expenditure investment in the core, will you be, I guess, rethinking your capital management in terms of the dividend moving forward, given that $5 million is not a big impost on the business relative, I guess, to the past number of years and the cash generation of the business?

We affirmed our dividend policy at the AGM recently, Peter, as you know, and we're very comfortable in that 50% to 70% of NPAT range. That gives us, we think, the right balance between returning money to shareholders, which we clearly are focused on as well as investing in growth opportunities for the group. So we're pretty comfortable at that level. More than happy to take questions from the room. I think the people that are on the call can also get the benefit of the questions. We might do one round of that and then see where we get in terms of cutting off the call and continuing the discussion.

I might kick it off. Tim Plumbe, UBS. Just a quick question in terms of the site evaluation. I mean what you've historically experienced is sites that originally looked all right suddenly had competition coming into them. How nimble can you guys be in terms of changing those sites? And how much insight do you have into if a new competitor is going to be entering in that market at the same time that you're thinking about entering into that specific suburb?

Well, we rely on a combination of publicly available information, Tim. And as you know, tracking it through the council approval process is a murky game, but you do get information on what people provide. Does get tricky when they put in that catchment for a mixed-use development, including childcare. It probably ends up being a resi complex, but we try and capture all of those. We also combine it with an assessment of our -- from our ops team, and we get continual feedback on what they're seeing in the market and try and form a view as to what's likely to come our way. And then the last thing we do is, we -- this is where we're really focused on being the best relative location in the market. So -- and Rob's done, I think, a very good job to date. We've identified markets where the overall dynamics look positive, and we've secured what we think is the best location in that market. That gives us a bit of additional confidence in that if in 2, 3, 4 years' time someone does open up in that catchment, well, a, we get opportunity to establish our foothold; and, b, they're in a disadvantageous relative location so we can defend our turf a lot easier. Yes. But to answer your question, you can never truly predict someone in the next 12 months, say, we've got a pretty high degree of confidence on. What we're focused on is how do we defend changes that happen in the 2-, 3-, 4-year period.

Gary, the $400,000 to $500,000 capital cost per center is the top end of that sort of [ build-out ] of the inflation that we're seeing sort of in the building industry at the moment?

So that's for in-room educational resources. So it's not tied to any construction cost per se. So we're pretty happy we know what that will look like for the next little long. Yes.

So the $5 million you expect to spend for a year, though, there's no construction cost in that?

No. We -- in some centers, we make a pretty small contribution of playground cost, but we're not seeing that being the material driver of the number. So we're pretty confident around that capital number.

Any of those costs will be reflected in the rental rates that are negotiated and agreed.

Gary, you talked a little bit about what you're seeing from other competitors in the market. I mean if I look at the average of 10 centers, say, you get rid of the 52 underperforming, that kind of gives you a supply rate of about 2.4%. There is still an imbalance between demand and supply in the market at the moment. So what needs to happen to neutralize that imbalance? And I mean, how are you seeing the demand side of things going forward given changes to migration, given changes to birth rate, et cetera?

Yes. And I'll apologize because this is not a 30-second answer, but you asked me about going through the demand signals as well as what's happening in supply. So demand, we've had some positive news in the last little while that's actually strengthened the demand, particularly over in 12 months plus. We thought we have -- so what drives demand? Workforce drives demand, and I think we'd all agree that the numbers we keep seeing on a quarterly basis are stronger than what everyone had seen coming out of COVID. Second thing that drives demand is the birth rate. We thought we would get a reduction in the birth rate. The Medicare stats say that there's been a 22% increase in pregnancy-related scans. So we don't think that risk is as material as what it was. In fact, it might end up being a slight positive rather than a negative. And the third thing that will impact demand is international migration and, clearly, that's a negative story. But demand, you'd say, is nowhere near as negative as what we thought it would be. And arguably, it's kind of a neutral game from a -- and that's -- you then combine it with the budget announcement, which was stimulatory from a demand perspective in that it upped the subsidy for families who have got 2 or more children in care and also removed the annual cap of $10 560, which we've got families bumping up -- have been bumping up against that for the last few weeks. So we think both -- they kick in, in middle of next year. Again, we think that's a broad positive. To answer your question, does that then lead to now every person [ and their dog is ] going to go and build a childcare center? We are hearing anecdotally out of the construction sector that the pivot that occurred out of residential into childcare in 2016 and '17 is showing signs of neutralizing and maybe even reversing as there's a very strong demand for residential housing. So those developers may -- are looking at the margin. They're earning decent returns on those projects that may help dampen the supply. What's driving supply? What we can tell you, Tim, is it's not the big end of town. We're doing 10, which, as you called out, is a couple of percent. Good start of really pretty neutral. Guardian are growing. They need to grow. They've got a material CBD exposure that, we think, structurally is a bit challenging. So they're trying to diversify away from CBD and [indiscernible]. There are a couple of smaller players like [ Edge and Journey ] that have currently 20 centers that are looking to grow by about 10, combination of brown and green. But that big end of town, at -- if you say that demand is growing at 2.5%, if you say that the existing network is 8,000 centers, I'm using a bit of rounding, we're just maintaining our share of [ growth ]. We're not driving an uptick at this point. We will keep a close eye on whether those demand signals start changing smaller operators and developers' minds around increasing the network. We're not in the game of being the leader of that pack. We do think there are pockets of opportunities that make sense for us to pursue, but we're going to do it in a very sensible way.

So what do you need to neutralize that? I mean everyone says there is an imbalance, right? And if everyone continues to grow at the same pace of demand [indiscernible]?

What needs to happen is a longer-term game of the scale operators providing a differentiated offer so that the smaller operators' confidence level in coming in and taking share gets diminished. And what I see about what operators like [ PCBs ] and guardian and the journey that G8 is on, that will happen over time. We have the access to people and capital and resources that we can start presenting a differentiated offer and make it harder for smaller people to enter the market. Over time, that then drives supply decisions.

Gary, Sharyn, just in terms of -- back to your competitive positioning, as you just mentioned, you have access to various personnel and resources. But how do we think about when you're selecting new centers? What filter and what rigor is put into understanding labor in a given catchment supply of labor, attracting talent?

Yes. So we actually -- part of our assessment is, we go and work with our operations team and get their view of what the local market is. We clearly look at our own metrics as well. Probably a good example would be, if I use a specific example, say, a region like Bendigo. If we were looking at a greenfield center in Bendigo, first thing we do -- we've got a couple of centers that are performing well in that catchment. We would go -- what's they're going to do to the labor market in that catchment. We reach out to our ops team. We'd look at recruitment data in that market. We will be able to access a team that will make that a successful center. And off the basis of that, we again form a risk-weighted view as to whether we look at pursuing that opportunity.

And how far ahead in advance do you get [ starter ] just in terms of the timing in selecting a center because you would be nimble in...

Yes. I'll probably have Rob to talk to that. It's not a 5-minute exercise when we're going through the assessment, and developers don't expect us to give them an answer in a week. We haven't struck situations where we're taking too much time for them to say, I'm moving on to the next opportunity. And part of that is setting up a repeatable process that we can get through on a timely basis in terms of ticking through all the filters internally.

So generally, that assessment process takes 2 to 3 months for the identification of a potential target with our [ social ] partners to identify suitable locations within our target markets. We then go through our internal and external validation processes that Gary explored. We do engage with our operations teams for their opinions regarding market location and also access to appropriate talent. We make our commitments relatively near after a couple of months through documentation and design to the center in the formation of an agreement for lease at delivery. Depending on the development approval and construction process, it could take potentially 12 months plus. And so market may move during that time period, but the assessments made having regard to the way in which that markets perform not just at that point in time but generally. So we would generally expect material movement in those market dynamics with a forward view unless we, as part of our assessment process, are also mindful of future developments.

[ Simon Maloney ] from [indiscernible]. Just on the impaired centers in 2020, the $9.6 million loss, is it fair to assume that come 2021, that will be zero, no loss from impaired centers?

So in terms of the color on the impaired centers, the pre-AASB 16, the metrics we're giving, where they lost $12 million and then they're moving downwards. In terms of the $9.6 million, that's on a statutory basis basically. The nuance in the reporting impaired on a statutory basis is because their asset was impaired, the impact of their rent is a bit smaller in the core. So it is quite hard to measure on a statutory basis, the impaired number. So what we'll give is pre-statutory amount, and that moving to zero will very much depend on when we exit those arrangements basically. And as we've said before, there is a cohort of centers with quite long lease tails, mainly those 13 greenfield centers. So in terms of the exits of others, we're exploring what the various options are. We've captured the lower-hanging fruit in the first parcel, but we have acknowledged that those greenfield tails will be a bit more challenging.

So the impairment that you [indiscernible] incorporate, often these things happen, so to make allowance for onerous leases or to neutralize the impact of future losses. So you haven't done that in the impaired...

So the impairment has reduced the quasi rental expense that we currently have on those centers. But what you'll see is when you look back through our full year reporting, the impact of the leasing standard actually would have made the group $12 million worth of net profit before tax level. We then move into 2020 where we had 9 months' worth of that reduced rent from the impaired, and it brought that impact back to around $3 million or $4 million, which is what you're seeing in this converted table. Moving into this year, the impact of the standard is neutral. The impaired centers are playing into that, although being offset by what would have been a negative in the rent line from the other core centers. And that's why we're getting a neutral impact on the application of the standard now.

At the AGM, you had 13 of these impaired centers, but you've got rid of 2, with contracts being signed in another 7. [ I don't read ] negotiations...

Yes. And that's why we'll keep referring that to -- remember, in 2019, that cohort lost $12 million. We've now exited X representing X amount of...

I think it was about [ $1.9 million ]...

Yes. So we'll just keep giving that milestone so people can see how the tails are being exited.

So that low-hanging fruit, was that around the tenure of the lease that made it easier or alternative use case?

It's predominantly tenure of lease, and -- yes, I'd say that's the main driver.

Is alternative use case feasible way of getting out of these lease? Or is the rental that you've got just too high to make that a...

So the ones we've sold, they have all been to people that will be operating a childcare center. What we find is that a local operator with their assessment of the impact they can have on relationships in the local community, et cetera, they have more bullish view of the center, but we let them take over the obligation. For the larger greenfield-type centers, we will be exploring all avenues around exit, including weather an alternative use is possible and feasible. But your point is very valid that the return that the landlord is currently getting on that asset, that's going to make that pretty challenging, which is why we think those are going to take a little bit longer.

What is the average length of the lease on those centers that are remaining?

So the greenfield, the 13 greenfields that we're talking about, that would be a high-level number at 10-plus years. They're pretty new.

Group of 52 was around 7 years overall with those greenfields [ of capacity ].

I think what we might do is we'll let the people on the teleconference go if there's no more questions. Thanks for joining us today. We look forward to providing you an update down the track. Thanks, everyone.

Thank you.

There's 2 more questions. Okay. Apologies. I think there are a couple of questions that popped up.

Your next question comes from Gareth James from Morningstar.

Firstly, could I just clarify? So on the new greenfield centers that you're talking about opening, will those centers all have the same brand?

No, not necessarily, Gareth.

Okay. And I mean, more generally, what are your thoughts on having a kind of more consistent brand across the group? Is that not a way that you could create a bit of pricing power?

So the -- if we take -- I'll say here a couple of things. Certainly, in terms of new greenfield, the number of brands will be limited, very limited, but it won't unlikely be a single. We are continuing our assessment of how we can rationalize the number of brands in the portfolio. To date, that has not been as high a priority as our turnaround program and our network optimization program, but certainly something we'll continue to assess and evaluate over time.

Okay. And just a second one on the invested capital. I think you're talking about kind of circa $500,000 typical invested capital per center. Is that right?

Yes.

Yes. And so I mean how long does it normally take before that invested capital is offset by fees in advance and deposits paid by parents?

So the fees in advance are usually 2 weeks ahead. We don't really look at the working capital in that way by taking the $500,000 into account. We really look at the profile of the earnings and a payback on that capital through the earnings line. Now the sooner they ramp up, obviously, the earlier that happens. You can see in some of our earlier tables where we were talking about the centers that have matured, you can see some metrics there and probably we take some averages from those metrics in terms of per-center earnings and that might give you a feel for payback on that kind of capital level.

Sure. And just in terms of the $500,000, I think you talked earlier about that relating to in-room resources. I was just wondering if there are any other costs, like, relating to the lease or anything like that, that you'd have to incur.

I might let Rob talk to that because there's OpEx...

So not generally from the CapEx. It's in-room resources, the IT equipment center operations and that's covered with that provision. There are very limited other expenses associated with the establishment of the center, potentially things like legal fees and registration costs, but it's certainly not material. Only by rare exception have we seen a need to make any form of contribution to the capital cost for the development of center. Generally, our approach is to incorporate that within the rental structure of the lease.

Your next question comes from Deana Mitchell from Australian Ethical.

I just wanted to ask, if I look at it from an EBIT-per-center basis, the EBIT per center for your mature greenfields is much higher than on Page 13, your core center EBIT per center. I just wanted to know the reasons that you think that this gap exists and whether there's a higher earnings capability of the core from an EBIT percentage perspective, whether that's a metric that you look at as well.

Certainly, in terms of the core and lifting that EBIT per center, that's the key focus from our improvement program. What is good to see is when you do look at those greenfield centers, where we have a great-looking facility, we've been able to support them quite closely, location being good. You do tend to see quite good EBIT returns from those on a per-center basis. So certainly, Deana, the intention from the improvement program is to lift the EBIT per center from that core group.

The cores got impaired.

Yes, the core does have impaired in it as well, Deana.

Perhaps one follow-up question from that. Just when we're thinking about -- so if I look at the calendar year '17, '18, it looks like about $630,000, $640,000 per center on average. Are you saying that, that should be higher than normal -- if we look at calendar year '21, and we got 82% occupancy, 83% occupancy, what would that look like in terms of EBIT per center?

I guess you're referring to the COVID impact that might be in the calendar year 2020?

Yes, just on the business as usual, like, calendar year '20 has lots of moving parts, which I wouldn't say is necessarily reflective of the business going forward. So how should we think about the historical portfolio if they can generate a similar sort of occupancy around that 82%, 83%? What sort of EBIT does that spit out? And then also just on the new centers, if you're assuming about 80 to 100 spaces per center, what does the EBIT look like when you're modeling out of maturity?

So in terms of the 2020 EBIT itself, because for these centers, the government's subsidy, ignoring JobKeeper, which we had for a few months, was linked to their occupancy level, so there is still a link for these 2020 numbers that quite closely resemble the occupancy that, that center has. So it's not a completely separate link in terms of these numbers. Because we were missing out on [ parent ] revenue, that's why these numbers could tend to be a fraction lower, although when you look, they want the JobKeeper subsidy as well. What we saw out of these greenfield centers during COVID, and we saw it across the broad network, some centers weren't as impacted by COVID as other in terms of occupancy. So you can see that the average occupancy of these centers were still very strong even in a COVID impacted year that would be center by center. In terms of the broad production of EBIT from a center, very much reliant on the average fee for the center, the size of the center. But if you have a look at our historical wages as a percent of revenue, rent as a percentage of revenue, you can start to get a feel for 100, 120-place center at an average fee -- our average fee is about $118. But if a center is run well and produces good occupancy, you are talking about EBIT higher than our current average per core center.

So Harmony, on the basis there's no more questions from people on the call, we might let the callers go and thank them for their time and look forward to giving you an update down the track. Thanks, everyone.

Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.