Correspondence

[copy typed from PDF of letter received from Metlifecare Limited]

Metlifecare Limited

Level 2, Metlifecare House
302 Great South Road,
Greenlane, Auckland 1051 

Mr Bruce Sheppard
Chairman
New Zealand Shareholders Association Inc
Corporate
C/- PO Box 6310
Auckland City

22 June 2009

Dear Bruce

Metlifecare Limited

Thank you for meeting Michael Barker and me on 12 June 2009 to discuss your letter of 21 May and further explain your wish for greater transparency in reported financial accounting. We support the principles of greater clarity in financial reporting.

As discussed, the adoption of IFRS accounting has affected the clarity of how cash is derived and reported by some retirement village businesses. The underlying reason is that previously under NZ GAAP much more of retirement Village operating cash flows and development sales and resales cash flowed through the P&L. Now under IFRS, the operating cash generated flows partly through the P&L and partly through the Balance Sheet. To overcome this issue, Metlifecare’s 2008 Annual Report stated its operating cash flows from operating activities after interest and tax quite clearly on page 22 and page 53.

As discussed at our meeting, one of the key problems with the application of the methodology you have used is your continued reliance on EBITDA as your operating cash flow proxy for cash available for debt servicing. EBITDA originated many years ago as a pre IFRS accounting measure. In some IFRS accounting circumstances, EBITDA may no longer be valid as a relevant cash flow measurement where some operating cash flows through the balance sheet. This is particularly the case when applying IFRS accounting to Retirement Village businesses.

As suggested in our meeting, if you wish to stick to your methodology, then I believe you need to vary the old EBITDA measure with a new measure that picks up the Balance Sheet component of cash flow movements under IFRS. I have suggested a reconciled method further below.
Another issue in the analysis that you have provided is that you need to separate project specific development debt from core debt on the balance sheet. Using our 2008 published information, you will note from Note 15 on page 45 that Metlifecare had $52,943,000 of development work in progress as at 30 June 2008.

Whilst under development no sales income is recorded as units have not been sold but the funding to pay for the land and the development costs accumulates within our total balance sheet debt. We would also point out, that in the half year to 31 December our development work in progress would have increased further as we have a large premier medium density Retirement Village under development at Takapuna. The first stage of this facility was opened on Saturday 20 June and related sales will commence thereafter. This increasing development component of total debt might further explain why your analysis and conclusion from the half year results are off the mark.

In summary, it would appear that both the numerator and the denominator in your various calculations need to be adjusted to enable you to reach more informed conclusions. Your initial EBITDA cash flow proxy calculation understates the cash available to service debt. The EBITDA to Debt ratio has a denominator that overstates the amount of debt that is to be serviced by the cash proxy in the numerator. Your three other ratios involving debt calculations should perhaps also segregate development specific debt in the calculations to be more meaningful to a user of financial statements.

As discussed, we will endeavour to provide greater clarity to enable these calculations to be done more easily when our 2009 Annual Report is prepared. However, in the meantime, I set out below some figures extracted from our 30 June 2008 published financial statements which may help you to reapply your methodology in a way that overcomes the restrictions and distortions of IFRS reporting for retirement village businesses.

The above reconciliation shows where there is inconsistency in an EBITDA calculation as a proxy for operating cash flow generated by our retirement villages under IFRS accounting. As you can see from the above table, it is suggested that a more accurate proxy of our company’s cash flows to service debt can easily be extracted from the 2008 Financial Reports. If you take the Net cash flow from operating activities $23,630,000 and add back the finance costs $9,954,000 this will give a more accurate core debt servicing cash flow proxy $33,584,000 last year.

Maintaining EBITDA as your proxy method is a flawed measure under IFRS reporting for retirement village businesses. I do not know if adopting the same rationale as suggested above would help you to resolve your issues with the other 47 companies surveyed you mention in your letter.

Thank you for your useful discussion, we support greater clarity in financial accounting. We will endeavour to clarify our business cash flow sources and debt types with greater transparency when preparing our 30 June 2009 Financial Statements.

Yours sincerely

Dr Charles MacDonald
Chairman