Regis Healthcare Limited (REG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Regis Healthcare Limited FY '20 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Dr. Linda Mellors, Managing Director and CEO. Please go ahead.

Thank you, Ashley, and good morning, everybody. Welcome to the Regis Results Presentation for the period ended June 30, 2020. My name is Linda Mellors, and I'm pleased to be making my first full year presentation as Managing Director and Chief Executive Officer since taking on the role in September 2019. Joining me today is Rick Rostolis, Chief Financial Officer. Rick joined Regis in March and brings substantial CFO experience across ASX-listed companies. Next slide, please. Our presentation today is in 4 parts. I will start with a summary of the company's response to the COVID-19 pandemic before we provide you with the details of our financial performance for the year, our strategy and growth plans and an update on the industry conditions and outlook. At our half year results presentation, I noted that it was a particularly difficult time for the aged care industry, with residential aged care providers operating in an uncertain government policy and funding environment, along with the impact of the poor care and experience highlighted by the Aged Care Royal Commission and associated reporting. I also spoke about the signs of recovery. The company was subsequently impacted by the COVID-19 pandemic: firstly, through the negative commentary about the sector and its response to the pandemic; and then directly as a second wave in Victoria and Melbourne, in particular, saw COVID enter into a number of our homes through community transmission. Moving on to the next slide. The company invested heavily in preparing for COVID-19 in addition to the systems and processes already in place, such as our Clinical Governance and Care Committee, chaired by Professor Christine Bennett; the substantial work with Board and executive in late 2019 and early 2020 to create our new clinical governance framework; and the creation of a new executive, general manager of clinical care and practice role. Again, pre-COVID, Regis created a national Infection Control Manager role. This role was filled internally with one of our experienced home managers who holds qualifications in nursing and infection control and had substantial experience in aged care. Our Board of Directors and executives met weekly during the intensive preparation phase with the executives meeting daily. We made a number of early decisions to reduce the risk of COVID-19 entering our homes, including the proactive introduction of stringent access controls during the first wave of the pandemic when we observed the exponential growth in cases; screening our employees, contractors and visitors upon every entry to our homes; additional touch point cleaning; the requirement for all staff to recomplete infection control and hand hygiene training, with 100% compliance achieved; and for all frontline staff to complete PPE training and PPE as in personal protective equipment; education for our residents and families in hand hygiene, cough and sneeze etiquette and social distancing was conducted. And we zoned staff within our homes to reduce the risk of transmission of the virus between areas of the homes. Our national support office worked diligently to secure additional PPE in an environment of scarcity and steep price increases. We established PPE hubs around the country to support our homes in the event of an outbreak. The company developed a comprehensive and effective communication plan that has been supported by our senior management team and clinicians across the country. Our workforce has been diligent in following the additional protocols in each home and we have been pleased with the willingness of our workforce to provide early information to the company that might indicate an increased risk, such as working across sites or having come in contact with a potential or actual case. The company has been disappointed by the disrespect shown to aged care workers and the stark differences in public commentary about health workers and aged care workers. The company has responded by providing additional support to our workforce and has regularly conveyed the company's appreciation to every worker that makes up the care and support team. The company has been well supported by residents and families who have continued to provide much-needed pride and appreciation to our workforce. Moving to the next slide, please. Regis has been impacted by the community transmission second wave in Melbourne, with 3 homes having experienced transmission of the virus. Our home in Brighton had multiple residents and staff diagnosed with COVID-19. While the virus was contained to 1 wing of the home, there was a significant impact in that wing. Sadly, 9 of our residents diagnosed with COVID-19 died during this outbreak, and I'd like to again extend our very sincere condolences to their families and friends. I'll note the significant impact of the outbreak on the Regis Brighton community with the grief also shared by staff at the home and visiting health practitioners. The outbreak at Regis Brighton is contained, and we expect to move into enhanced surveillance very soon with our last positive case now 16 days ago. We will then wait another 14 days before the outbreak is formally closed by the Department of Health and Human Services, if there are no symptomatic residents or staff. Regis Fawkner was also impacted by an outbreak. In this case, the outbreak was contained quickly, but sadly, 1 of our residents who was diagnosed with COVID-19, died in hospital, and our sympathies remain with their family and friends as well. The third home, Regis Cranbourne, has 2 employees diagnosed with COVID-19. All residents and other staff have returned negative results. Two other homes were placed into outbreak status with the diagnosis of a single staff member each who had worked during the presymptomatic phase of their illness. There has been no transmission to residents or other staff and these homes will move to enhanced surveillance following multiple rounds of testing. A number of other Regis homes were asked by the Victorian Department of Health and Human Services to go into lockdown due to a close contact risk. Again, there was broad testing of residents and staff with no positive cases detected. These homes have all returned to normal operations within the limits of the Stage 4 restrictions in Melbourne. Comment to the response across each of the impacted homes has been a very rapid stand up of our outbreak management team and implementation of our outbreak management plan. Initial disruptions to care services and support due to the rapid isolation and furloughing of close contacts has been managed quickly and efficiently. Our communications with the residents, families and staff of impacted homes has been at least daily and has been well received. In addition to our daily written communications, residents have received in-person updates from our staff and families of residents in our homes with a COVID-19 outbreak, have each had a single point of signed contact with a senior manager and regular stone updates with our clinicians, in addition to the daily written updates. Our staff diagnosed with COVID-19 have been supported by our managers and the people and culture team. There were numerous challenges, particularly early in the second wave of the virus in Melbourne. And these included the availability of a surge workforce with our internally recruited pool reluctant to work in an outbreak home. We have worked around this and redeployed existing staff from other Regis homes as well as using temporary surge workforce arrangements. There were delays in access to testing, result notification and contact tracing. Our outbreak management team conducted our own contact tracing to ensure timely decisions. The expectation on aged care homes to function as acute wards has been particularly challenging. The company has required hospital equipment, such as IV poles to provide the care specified by hospital doctors in an environment that is not designed to care for acutely unwell patients. The unfair public criticism of aged care providers and workers regarding COVID-19 outbreaks, which has not been experienced by other care settings, increased worry and was detrimental to the well-being of our residents, families and staff. The contrary also impacts the willingness of the aged care workforce to attend site during an outbreak. On a positive front, our resident families and staff benefited from the specialist expertise of a number of residential in-reach units provided by Victorian hospitals. Moving to the next slide. I will shortly hand over to Rick Rostolis to discuss the financial and business results. Before I do, I can advise that the company delivered an underlying EBITDA pre-AASB '16 of $85.1 million. I beg your pardon. Next slide, please. So I'll just start that sentence again. I can advise that the company delivered an underlying EBITDA of $85.1 million and underlying NPAT of $21.5 million. These results are below our 2019 results and 2020 expectations that were released to the market earlier this year prior to the company withdrawing guidance on the first of April. The results reflect the ongoing funding challenges, the impact of the extended Royal Commission and the impact of the COVID-19 pandemic. Notwithstanding these impacts, revenue from services was up 4.8% during the year, while net debt reduced to $236.7 million. The deferred 2020 interim dividend will be paid on the 30th of September, and no final dividend was declared. Later in our presentation, I will share with you our reflections on strategy and growth and the current industry climate. The company's focus remains on providing excellent care and services to our consumers and improving our financial performance. I'll now hand over to Rick to discuss the financial and operational results.

Thanks, Linda. If we just turn to Slide 6, which is the financial summary. Thank you. So for the sake of clarity, following the transition to AASB 16 leases from the first of July 2019, we refer to pre-AASB 16 results in this presentation and also in our ASX release made earlier today. This is to ensure that all stakeholders have a clear and accurate like-for-like comparison with the prior period results. As Linda has mentioned, revenue from services of $677.9 million was 4.8% up on the prior year. Included in FY '20 revenue from services were the following items: $6.4 million of additional government funding received in June; $1.8 million of temporary ACFI funding for the period March to June; we are also expecting another $800,000 of temporary acuity funding for July and August in total; and $4.9 million contribution from the acquisition made on the first of March of the lower Burdekin business and assets in North Queensland. It is worth noting that the 2 additional amounts of government funding received during the year totaling $8.2 million was $2.6 million down on the additional funding received in the prior year. Revenue from ramp-up homes contributed $32.7 million to the revenue increase, while revenue from steady-state homes was down $11.2 million on the prior year, reflecting a drop in occupancy from 91.7% to 90.3%. Government revenue of $471.1 million was up 4.2% in the prior year and contributed 69% of revenue from services. Second half government revenue of $241.6 million included the $8.2 million additional government funding and a $3.6 million contribution from the Lower Burdekin acquisition. Excluding the additional funding, and contribution from the acquisition, government revenue was evenly spread between the first and second half of the financial year. Resident revenue of $195 million was up 6.4% year-on-year and flat half-on-half. The lower occupancy that is being experienced across the industry impacted the steady-state portfolio. In the main, we observed occupancy declines in Victoria and Western Australia, with other states in the Northern Territory relatively flat year-on-year. Staff expenses of $492.3 million accounted for over 72% of revenue from services, up from 69.3% in the prior year. $11.7 million of the increase related to steady-state homes driven by annual increases in enterprise agreements, which averaged around 2.5%, whereas indexation applied to government revenue was only 1.4%. Staff expenses during the second half of the year included COVID-19 related costs of $1.8 million; acquisition-related staff expenses of $4.3 million for the 4 months; and redundancy costs of $1.6 million. Additionally, extra public holiday impacts, EA increases and increased staff expenses in the ramp-up homes were incurred over and above the first half. Including these items, staff expenses were up in the second half of the year versus the first half. In April 2020, the company restructured its back-office functions, resulting in approximately 50 roles being made redundant. The redundancy cost of $1.6 million has been expensed in the second half of the financial year, and we expect an ongoing cost benefit as a result of this process. Underlying EBITDA of $85.1 million was 23.6% down in the prior year. Underlying EBITDA for the second half of the year was $40.7 million and included the additional government funding mentioned earlier of $8.2 million; and direct COVID costs of $3.5 million, including the $1.8 million of staff expenses; redundancy costs of $1.6 million; additional public holiday pay costs over the first half of the year; and several write-offs of the prop and loss account as a result of a review of the company's capitalization of assets policy. The increase in depreciation was mainly due to the impact of ramp-up homes and the accelerated depreciation of certain capitalized IT projects. Finance costs, excluding the impact of AASB 16, were down year-on-year, reflecting the reduced level of net debt carried by the business. Please note that the tax expense was impacted by the nonaccessible gain on acquisition of $4.6 million and the nontax deductibility of the goodwill impairment charge of $20.6 million. Excluding these 2 one-offs, the tax rate was circa 30% of the pretax profit. I will talk to one-off items, net debt, RADs and CapEx separately in this presentation. Just turning to Slide 7. Operational places increased to 7,218 over the year, mainly due to the acquisition made in March 2020. We have presented on this slide the breakdown of occupancy of our steady-state homes and those in ramp-up phase. As already mentioned -- sorry, average occupancy in steady-state homes in 2020 was 90.3% compared to 91.7% in 2019. Steady-state average occupancy during the first half of the year was 90.4%, while the second half was 89.8%. We saw a dip in occupancy in May and June as admissions slowed and respite discharges increased due to COVID-19. Steady-state occupancy at June 30, 2020 was 89.1%, and as of 24 August was 88.6%, with Victoria's spot occupancy at June 30 at 84.8% and down to 82% as of 24th of August due to the impact of outbreaks. Average occupancy in the 10 ramp-up homes continue to improve and averaged 79.2% for the year. Second half average occupancy was 82.7% versus the first half of 75.1%. The 4 ramp-up homes in Western Australia and the 2 in Queensland showed strong increases in occupancy in the second half of the financial year. Ramp-up home occupancy at 30 June, 2020 was 83.3%, and as of 24 August was 85.4%. While we are focused on improving the occupancy in steady-state homes, this occupancy result reflects in part the industry-wide occupancy challenges for the sector, and the impact of COVID-19, particularly in the second half of the financial year. Having said that, we know that we can do better. Aged care government revenue per occupied bed day was $197.40 up 1.2% on 2019, in line with cope increases but also influenced by declines in steady state and improvement in ramp-up homes occupancy. Aged care resident revenue per occupied bed day was $84.90, up 3.5% of the prior year. This increase was in part due to the take-up of additional services packages across our ramp-up homes. The number of RADs held increased during the year with circa 45% of permanent residents having paid either in full or part lump sum payment. The average RAD held increased to nearly $422,000, which is up from $405,000 in 2019. There was also a modest decrease in the average incoming RAD to $462,000, reflecting the fact that some ramp-up homes are nearing mature occupancy levels. Probate liability remained steady at 11.5% of the year-end RAD balance. Please turn to Slide 8. Thank you. We presented on this slide a reconciliation of the underlying pre-AASB 16 EBITDA to reported EBITDA. I would like to briefly discuss the noncash goodwill impairment. In line with prior years, the company has undertaken an assessment of the carrying value of noncurrent assets as part of its full year accounts process. The company reviewed each of its 4 cash-generating units, or CGUs, by comparing the carrying value of assets to the recoverable amount using a value in use discounted cash flow model. The result of this work showed that the goodwill attributed to our Western Australian operation was impaired by $20.6 million. As a result, this amount was expensed in FY '20. Please note that this is a noncash charge to the profit and loss and does not impact our banking covenants. The other item of note is the gain of $4.6 million on the acquisition of the business and assets of Laurel Burdekin, which has been recognized as other income in FY '20 but does not form part of FY '20 underlying earnings. With respect to the AASB 16 adjustments made, we have recognized in the FY '20 year $57.5 million of imputed income on RADs and disclosed this in other income, together with $1.3 million in depreciation and finance costs. Please note that there was no impact to the net profit after tax as a result of these adjustments. A reconciliation of AASB 16 adjustments is provided in the appendix after this presentation for your reference. Moving to Slide 9. As is appropriate in the current environment, the company is taking a conservative and disciplined approach to managing debt. Net operating cash flow for the year of $127.2 million was underpinned by underlying EBITDA of $85.1 million and net RAD cash flow inflows of $69.8 million. Net operating cash flow in the first half of the year was $74 million, excluding government funding for January 2020 received an advance of $37 million. The first half net operating cash flow included $47.1 million from RADs, whereas the second half net operating cash flow of $53.2 million included $22.7 million of net cash inflow, reflecting the negative impact of COVID-19 on sales and admissions in the March, the June period of the financial year, particularly on our steady-state homes. In total, ramp-up homes contributed $87.2 million of the net RAD cash inflow during the year, whereas steady-state homes returned a negative $17.4 million, with the majority of the RAD flow recurring in the March to June period. We continue to monitor RAD flows during the first weeks of the new financial year, with the company taking proactive steps, including tighter cost control, limiting CapEx and reviewing non income-producing assets for potential sale to preserve and generate cash. As an example, subsequent to year-end, the company entered into a contract with a third-party to sell a vacant parcel of land in Queensland. Proceeds in the sale amounting to $21 million will be received by December 31, 2020. We will continue to identify and potentially divest other nonincome-producing assets over the next period of time. Total net debt at 30 June of $236.7 million is well within our committed bank facility limit with undrawn facilities at 30 June of $278.2 million. Importantly, a $150 million tranche of the $520 million of facilities was refinanced in June, with maturity now at 31 January, 2022. I'll note that the total reduction in net bank debt over the last 24 months has been $167.1 million or 41%. With respect to dividends, the deferred FY '20 interim dividend will now be paid on 30 September, as Linda mentioned. And due to the ongoing uncertainty caused by broad industry dynamics and the COVID-19 pandemic, no final FY dividend was determined by the Board. Just turning to Slide 10. The company invested $44 million in capital expenditures during the year on development including land acquisition, refurbishment and replacement. Of the $44 million, only $13.4 million was spent in the second half of the financial year, reflecting the Board's decision to pause a number of planned development activities. Investment in new homes are slow due to the lack of certainty in federal government funding and policy. Subject to improved market conditions, the company plans to commence the development of an aged care home at the greenfield Camberwell, Victoria site later in the 2021 financial year. The remaining developments in the pipeline, activities such as preparing land for commencement, development approval and design documentation are underway in readiness to commence construction once conditions are favorable to do so. Moving to Slide 11. As you can see on the slide, the move away from RADs to DAPs as per industry trend continued during the year, with 100% RAD pay is now representing 31% of the permanent resident profile. Notwithstanding the above, our paid up RAD balance increased to $1.158 million during the year, reflecting the strong RAD cash inflow from ramp-up homes. Residents paying a RAD/DAP combination have increased during the year, while DAP payers as a percentage of permanent residents remain steady. In FY '21, with the MPIR attached to DAPs having reduced again, it is likely that DAPs will continue to be favored. In my view, capital funding in this sector needs to be reviewed, and we look forward to government reform post the Royal Commission, where we hope that this imbalance between RADs and DAPs will be addressed. With that, I'll hand you back to Linda.

Thanks very much, Rick. And if we could move to Slide 12, please. So in this section, I will take you through the key elements of the company's strategy and the company's thinking in the context of the ongoing uncertainty in government policy and funding and the impact of the COVID-19 pandemic. Moving to the next slide. Just a reminder, first of the company's size and scale with residential aged care homes in every state and the Northern Territory. You'll note that the addition of the lower Burdekin homes in Queensland takes our portfolio to 65 homes nationally. You'll also see that our total operational places have increased by the number in the lower Burdekin acquisition. Regis also holds 8 retirement villages, 5-day therapy centers and 6 home care business bases. So to the next slide, please. From a business perspective, Regis' aim to deliver long-term sustainable growth has not changed. However, the Board has reassessed the company's strategy in the current environment, given the impacts of COVID-19, the extension to the Royal Commission and the ongoing uncertainty regarding government policy and funding direction. The company has decided to place most of our growth projects on hold, pending greater certainty of investment returns. This follows a period of solid organic growth, but with investment returns lower than anticipated. The Regis philosophy is that by consistently providing excellent care in high standard homes, we deliver great outcomes for residents and their families, have more engaged and capable staff and, therefore, create an environment where the business is able to innovate, invest and grow. Regis remains focused on continuous improvement, and we'll continue to look for learnings and opportunities to stay at the forefront of care and services for our consumers. Regis' scale of operations mean we are able to provide a range of on-site and off-site care and support services that contribute to quality and safety of care for our residents and clients. Some examples include every Regis aged care home has nurses and care workers on-site 24/7. This includes an in-charge registered or senior enrolled nurse on every shift. Regis provides 24/7 senior registered nurse support to all of our homes across the country through an in-house nurse-on-call program. Our dementia liaison specialists and our club services sites, provide extended support to our residents living with dementia and their families. Our clinical support team is a national support service providing clinical support and coaching across all residential aged care homes. Regis also has centralized catering and housekeeping functions, which plan and monitor the Regis standards across all of our homes. Needless to say, cash flow is critical in this time of sector instability. The company will focus on increased improvements in occupancy, RADs and the value of our additional services product offering, noting that the COVID-19 situation in Victoria is not yet controlled and there remains negative sentiment towards the sector. Our disciplines around system, process and cost efficiency will continue. The Board has commenced a full review of all non income-producing assets and has already made a decision to divest a surplus land holding that was planned for future development. The company is reviewing our business portfolio and mix to determine where to invest in the near term. The company is developing a growth strategy for our home care business that we expect to implement in late financial year 2021 and through to financial year 2022. Of critical importance is preparing our business for the sector reform that we anticipate post the government's response to the final report of the Royal Commission, including the likely sector consolidation. With the Royal Commission now due to deliver its final report in February, the government has foreshadowed a funding response in the May 2021 budget announcement. Moving to Slide 15. It has been a difficult year for those companies. This follows a number of years of compressed returns and much lower-than-anticipated investment returns on our greenfield and brownfield developments, noting the multiple changes to the policy and funding environment since those business cases were approved by the Board. As a result, the Board has made the prudent decision to place most of the developments in our pipeline on hold, until such time as the government's policy and funding parameters are clear and there is a sufficient return on investment to incentivize the allocation of the company's capital. The company is hopeful of commencing the Camberwell development later in the 2021 financial year. There are no other developments in the current pipeline that are likely to commence this financial year. As Rick mentioned, the Board of Directors resolved to sell a parcel of land in Palm Beach for $21 million, with settlement to occur by the 31st of December. The company continues to review acquisition and development opportunities against our existing criteria, primarily quality of location, land and buildings. This is a time to keep a conservative approach to management of our balance sheet and debt. We will continue with our strategy to pay down debt using RAD inflows. We will also keep debt capacity in the event conditions improve and market opportunities are attractive. Moving to Slide 16. There have been significant environmental, social and governance achievements during the period. Our environmental program continues to mature. We have largely completed our solar and LED projects and we're seeing benefits through reduced admissions, emissions and usage. Our procurement team has been planning our waste management program for FY 2021. And our long-standing intergenerational programs have continued, with creative alternatives put in place due to the interruptions caused by COVID-19 and visitor restrictions. Our safe workplace initiatives continue and now incorporate extensive activities in the face of COVID. These will continue for the foreseeable future, and many will become part of the new way of operating. We continue to provide an Employee Assistance Program, and this has been an important source of support for our workforce, grappling with the challenges of COVID-19 at work and at time. Keeping our workforce engaged and valued has continued through a range of programs, including the Regis Spirit Program for engagement and recognition. We were particularly pleased to see a sharp increase in our Net Promoter Score relating to our employees' confidence in our services and their willingness to recommend our care. Our focus on cultural diversity, mental health awareness and disability support for our residents and workforce will continue. From a governance perspective, we have a capable and experienced board, and we benefit from the ongoing contributions of our 2 founders. The Board's skill mix is strong and valued and strengthened by medical clinician with expertise in systems planning and clinical governance. The timing of my entry into the company, along with new executives with deep and broad clinical, operational and leadership experience in a range of health, aged care and commercial settings, has facilitated a rapid and agile transition for the company. The company has taken a risk lens to the pandemic, with an insidious virus that is often transmitted unknowingly and without symptoms to protect our residents and our employees. There has been a constant focus on maintaining our care and service levels through well considered and executed business continuity planning. Importantly, our Board, executive and workforce recognized and responded to the physical, mental, cognitive and emotional threat of COVID-19 with great kindness and compassion. The Board Clinical Governance and Care Committee has now been in operation for 18 months and is overseeing the implementation of our new clinical governance framework. This committee will also provide leadership as we progress through the sector reforms post the Royal Commission. Gender diversity on the Board and executive increased in FY 2020, and both the Board and executive are balanced. Moving to Slide 17, please. The aged care sector continues to operate in an uncertain environment. So on Slide 18, a few things that I'd like to speak to this morning. Firstly, the company remains supportive of the Royal Commission and the critical importance of its work. The company is hopeful of a clear and strong response from government that sets out a policy and funding platform that supports the provision of consistently high-quality care that is sustainable over the long term. This will require a substantial increase to the budget allocated to aged care as well as other changes. A significant event during the period was the introduction of the new single aged care quality framework which took effect from the first of July 2019. Regis' welcome to this framework, which is designed to actively involve consumers in decisions about their care, with a key focus on dignity and choice. This framework should improve the consistency of care standards across the sector. Regis invested significant resources in educating and communicating the new standards to our employees, residents and clients. Pleased to advise that all 8 Regis homes that were subject to accreditation under the new standards were successfully reaccredited. The aged care sector received a number of funding boost through the year in response to the financial pressures facing the sector and the impact of the COVID-19 pandemic. The company also acted as a pass-through for the government's retention bonus for aged care workers. Moving to Slide 19. I'd like to draw your attention to 3 events subject -- subsequent to our balance date. The COVID-19 pandemic has impacted a number of our homes in Victoria in the second wave, noting that we did not experience any outbreaks in the first wave. This has been a very difficult time, and we remain grateful for the understanding and support from our residents, clients, families and employees, as we have responded to the various health directions and testing requirements. Compliance has been maintained in all homes impacted by an outbreak. Regis advised the ASX on the 3rd of August that it has been the subject of a cybersecurity attack. The company promptly implemented backup and business continuity systems and the incident did not affect the delivery of care or services nor did it materially impact our day-to-day operations. As noted earlier, the company entered into a contract of sale of a parcel of land in Palm Beach, with settlement to occur by the 31st of December. The sale will provide the company with $21 million, less cost of sale. Moving to Slide 20. The company has faced a very difficult 12 months. I'm proud of the continued focus on maintaining excellent care standards while we optimize our business performance. The executive team's focus on executing business performance improvements, including improved occupancy and revenue generation and disciplined cost management, will keep the business stable pending sector reform. The company has prudently paused most of our new home developments due to the lack of certainty surrounding federal government funding and policy outcomes following the Royal Commission. As we mentioned earlier, Regis now plans to commence our Camberwell project later in the financial year. We will continue to review our portfolio mix, acquisition and development opportunities while we conservatively manage our balance sheet and debt position. Given the current macroeconomic environment, including the ongoing impact of the COVID-19 pandemic and the extended Royal Commission, the Board does not believe it to be prudent to put forward any earnings guidance at this stage. We will provide a business update at our Annual General Meeting on the 27th of October. Before I conclude, I would like to use the opportunity today to again emphasize my support of and confidence in Regis' workforce and to thank them for the important work they do in caring for older Australians. They deserve the same appreciation and respect as other frontline workers. I would like to extend my thanks to the Regis Board of Directors for their expert guidance and commitment, our executive team and all of our employees for their individual and collective contributions to care, services and stewardship of the company. Finally, I would like to thank our residents, clients and families for choosing Regis and for their understanding and support as the company responds to the COVID-19 pandemic. Thank you. Operator, we can move to Slide 21, and I'll hand back to the operator to open the meeting to questions.

[Operator Instructions] Your first question comes from Tom Godfrey with UBS.

Maybe if I could just start on your occupancy. Are you able to help us with where spot occupancy currently sits today? And maybe just help us by characterizing where it is in your Victorian portfolio versus the rest of the country?

So Tom, I'll go back to -- if I can find it in my sheet of paper here, I did actually provide that data. But let me go back. Give us a second and I'll find it. So what we said was spot occupancy at 30 June, for steady-state homes, that's 55 of our 65 homes are designated as steady-state, 89.1% at 30 June; 88.6% as of the 24th of August; and Victoria, in particular, which is 18 homes, 16 of which are in Melbourne, 84.8% at 30 June, down to 82% at the 24th of August.

Got it. Thanks, Rick. Apologies for missing that earlier. Can I just maybe move to the RAD flows, and you've laid that out nicely on the slide -- I think it's Slide 9 -- sorry, one earlier. Slide 7, actually. It looks like the mature portfolio had net outflows of about $17 million. Can you just help us sort of step through the key drivers there? Is it predominantly just the occupancy unwind? How much of a sort of change in preferences are you seeing? And can you also just speak to the incoming prices? They look like they've come off as well.

Yes. So let's just go back a step. Let's go back to the half. And at the half the RAD inflow for steady state, so the 55 homes, was $1 million, positive. So you roll that forward, and for the full year, we're down $17.4 million. So $18.4 million of it occurred in the second half of the year. And the bulk of it, if not all of it, happened from that period, March to June. Now I can anecdotally say to you that it's COVID. But what happened during that period, certainly through the first lockdown, and we went to stringent access controls on the 17th of March, we weren't taking admissions for a period of time. We had respites leaving and not being replaced by perms. So a lot of that outflow occurred in that 4-month period. Mostly April to June, but there was a bit of March as well. So up until then, it was still positive. So I can only conclude that it's COVID, but clearly, we need to keep a handle on that going forward.

Okay. Got it. And just on the pricing for incoming RADs. Is there a sort of discounting strategy going on there, guys, to assist occupancy? Or can you speak to that?

Well, I won't go into the details of discounting, but clearly, I would suggest to you from my understanding that most providers would be discounting. So we're no different. I think the reason why it's come off by 0.7% is because we've got these ramp-ups now getting closer to mature occupancy levels, so the average starts to come down a little bit. So it's not a concern as such, but it is -- there is an impact of the ramp-up getting to a mature level that actually then starts to offset the average incoming RAD. But the growth in the RADs held is from 405 to 422x. That's 4% up.

Got it. And Rick, maybe one more for you. You called out the back-office restructuring. Can you just give us a sense for what that ongoing cost/benefit might look like?

I was waiting for that question, so I appreciate it. So we let go of 50-odd roles late April. So I'm expecting around $250,000 a month to flow through, which would be circa $3 million. But I'll just caution that we saw a bit of it come through in June. So you could call it $2.5 million to $3 million, if that's where you want to land it for FY '21. And again, Tom, just to answer the question fully, understanding how you guys work, is that don't just take that in isolation because there are a lot of other things going on. But in my mind, that $2.5 million, given we've also not provided for salary increases for the same staff, so we should see that flow. But that, in isolation, is probably $2.5 million to $3 million cost benefit.

Yes. Got it. That's very clear. Linda, maybe just last one from me. You did mention before the sort of positioning of the Royal Commission final report and the funding response in the May budget next year. Can you just sort of step us through what your key expectations are around what the changes to the funding model might look like and also the regulatory framework?

Sure. Thank you, Tom. So the government flagged that they will have a funding response. Obviously, we don't have any details of that at the moment. But you will be very aware of the proportion of the sector that is currently operating at a loss. And care is not currently sufficiently provided for. Plus there's very tight regulation in terms of the other fees and charges. So we would expect and be hopeful of an increasing funding for care and some deregulation around those other fees and charges, and perhaps more user pays. In terms of other regulations, so we expect that there will be changes around quality, safety and service expectations. But look, we're not clear on what those changes might be.

Next question comes from Matt Johnston with Macquarie.

Just the first one, probably for you, Rick. $2.7 million of revenue from a former resident bequeathed to Regis. Did that hit in the second half?

Yes, it hit, I think I'm going to say February. Before I got here, about February.

And is that in the recurring EBITDA number in the second half as well?

Yes, it is consistent with prior practice.

Okay. And then I guess if you start taking the second half and looking into FY '21 with the occupancy challenges, even though there is some cost/benefit from a rightsized cost base of staff. Just trying to understand next year is going to be really tough, and with that occupancy decline, what have you seen in net RAD to mature homes in the first quarter so far?

Well, look, I'm really hesitant to give any sort of forward guidance, but I can tell you, July was slightly positive. I haven't looked at the August numbers yet, but I suspect they'll start to turn negative. So my view would be, if I can answer it this way, Matt, is we have $69.8 million come through FY '20, $22 million of which came in the second half. I've got expectations that the answer will be somewhere between $20 million and $40 million this year, given that the ramp-up homes are sort of coming to maturity, which is why we're taking these other actions around preserving and generating cash.

Right. So I guess the sensitivity, but if there were to be further RAD outflows, obviously, that could offset the remaining ramp up RADs expected to come through. Because I think if you back-solve from the $50 million to $70 million guidance in February, we'd only have around $10 million to $30 million left expected from developments, if that math is right?

Yes. Look, yes, your math may not be quite right. Look, again, I don't want to get into great detail, but I'm expecting more of that from the ramp ups. But my issue isn't so much about the ramp-up because I think there's probably 30 to 40 to come there. It's the steady-state stuff that we need to just keep a watchful eye on.

Okay. And so I guess just from March to June, can you see similar things happening in the business in the first quarter, especially in Victoria of why -- what led to those RAD outflows?

Yes. I think in the case of Victoria, yes, I'll be totally frank, I'm seeing some negativity in other states. I think there's some rub-off from Victoria. But the biggest issue for outflows in steady state is Victoria, as you could probably understand.

Right, okay. And then I guess just what are the bankers saying around the outlook for EBITDA? I appreciate you're not going to give guidance, but the numbers flow through pretty uninspiring. What are they saying around you covenants level? And where does development sit at the moment?

When you say uninspiring, what do you mean by that?

Look, if you annualize the second half, it's obviously a drop-down from the FY '20 EBITDA number. And assuming if you have -- whatever happens in greenfield ramp-ups on RADs, and your back book coming through on your mature, net debt may not move that much, but your earnings are going down. So I'm just wondering what the bank is saying around the covenants.

Well, we've said what we've said. We're $236 million of debt with a facility of $520 million. My expectation would be with some of the other actions that we're taking, that our net debt wouldn't move that much from that $236 million. I don't see it going significantly up, unless the sale falls through, for example. We haven't declared a final divi. We've pulled back on CapEx. We're reducing cost. So my expectation at the moment, with the caveat being I don't know how this COVID thing is going to play out, is that it wouldn't move that much from where it is, which is $66 million down from this time last year.

Okay. I'll move on. And just with the redundancies, is there anything to do with corporate development staff in that as well?

It's back office staff.

Okay. And so what sort of roles are they?

Administrative roles, including finance, IT, et cetera, HR.

Okay, great. And then final one for me. Just on the cybersecurity, do you envisage any sort of extra costs, I guess, just to bolster that up ongoing?

We've incurred some costs, but they're not material, Matt. Not at this stage. So we'll keep a watchful eye on that because these things tend to sort of drag on. But at the moment, we've incurred very minimal cost in relation to that.

Okay. Actually I want to squeeze one more in. Just in terms of, I guess, the comments around acquisitions and you still assess stuff, but you're then selling land. Just trying to get a sense of, is the acquisition more medium-term strategy at the moment rather than short term?

I'm trying to understand the question because you're saying acquisitions versus the land sales. So the land sales, let's be clear, are non-income-generating. So they've been sitting there for a while. And maybe in better days, they could have sat there a bit longer. But we're not in better days. So I think the Board has taken the right view to look at some of these non-income-producing assets to divest, and I think that's great. But in terms of acquisitions, I mean, we're starting to see a little bit of a flow-through now with pipeline of acquisition opportunities. But for us, I think we need to be very selective about what of these that we're looking to acquire, because I have a view -- and I'm new to the sector, but I have a view the consolidation will occur and that we will be in a position to hopefully pick the right ones to take on board. So I don't see it as medium term. I think it's more longer term, and I think more will come through post the Royal Commission outcomes.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Dr. Mellors for closing remarks.

Thanks very much, Ashley, and thank you, everybody, for joining us this morning. We look forward to meeting with a number of you over the coming days. And as I said earlier, we will provide you with a business update at our Annual General Meeting, which will be held as a virtual meeting this year given the COVID situation in Melbourne. Keep well, everybody, and we look forward to speaking to you again soon.

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