Well it’s certainly been another interesting half year in Aged Care!
The almost frenetic pace of acquisitions in the previous 24 months has slowed down somewhat with the publicly listed companies consolidating their recent acquisitions. The first event where we noticed this change was the news release of the Kennedy Acquisition by Estia Health in New South Wales.
After the announcement the market did not respond with the previous gains in share price post the announcement and. It became apparent that industry analysts were becoming rather sceptical on the pace of repeated acquisitions and integrations their more investigative of the exact details of each acquisition. Details the public operators prefer to keep close to their chests. This cautious consensus has continued through to the acquisition of much 006Ff the Masonic Care Queensland portfolio by Regis.
Further pressure on market consensus came with the publication of the Federal budget,detail of subsequent funding cuts a few months later and the recent Department news release that any attempts to recoup the subsidy cuts with an increase in privately funded fees would not be supported by the legislation(however we understand that there is some dispute regarding the status of such fees).
In combination with specific news of the three companies, in particular Estia, this change in market sentiment has caused an average loss of almost 60% in market value for the public players. Not an insignificant change!
While anticipated profitability rates have dropped significantly since the announcement of the funding cuts, demand for stock is still strong and now largely coming from the second tier and third tier sized operators who are no longer priced out of the market. Also still in play are well funded Newcomers who are looking to enter what remains a highly profitable industry.
Of real concern is the impact funding cuts and the subsequent market uncertainty it produces will have on future building projects. Asthese are trivial in meeting the future demand caused by the current demographic change. Only time will be able to tell if there is such an impact and if yes, of what magnitude.
Small and Old
With the focus on large and modern (80 plus Bed) facilities, particularly by the bigger operators, it is easy to forget that a substantial amount of existing Aged Care Homes in Australia are less than 60 beds in size and constructed more than 25years ago.
Due to the size and resulting Economies of Scale or lack thereof, in combination with no or very few single bedrooms with ensuites the life expectancy of most of these homes appears to be limited.
Nonetheless, Homes fitting the above description still do present an attractive investment. This is mainly due to the underlying assets, being the Approved Places or Bed Licences and the underlying freehold. In particular facilities in metropolitan areas present an opportunity to land bank a metropolitan property with a secure cash flow for the short to medium term.
As the goodwill component in such an acquisition is significantly smaller than in a more modern Home, the facility can be closed and sold for the underlying asset value at any stage should the operation become commercially unviable. This keeps risk limited and presents an additional attractive feature of such an investment.
Of course a well-considered exit strategy is at the heart of such a decision and needs to be in place in order to divest, or redevelop the assets further down the track when the facility becomes financially unviable or simply too dated to attract new residents. This can be the case when a new, purpose built facility begins operation close to the facilities catchment area.
In particular first time or small operators who were forced to sit on the side-lines during the last 18 months due to prevailing market forces should be aware of this opportunity, as these facilities can not only be acquired at a reduced price when compared on a per bed basis to their large and modern counterparts but also often have significantly smaller bond pools (per capita) which helps to ease the minds of financiers lurking in the background!
Equally larger and established operators can use such an investment to bank bed licences at a time where competition has made it increasingly hard to secure beds during ACAR. Should the respective operator be unsuccessful in acquiring all or part of the required total bed number they can secure beds this way and even realise a return on their investment, while they are building the new facility.
The 2016 ACAR was announced in mid-September and along with it came several changes. In total 10,000 places will be up for grabs.
Importantly Approved in Principle Places will only be made available at the state and territory level as opposed to offering a set number of places in each Aged Care Planning Region (ACPR) or through state wide pools (groupings of ACPRs), as was previously the case.
Another change is that specific targeting of geographic locations is now summarised on a Statistical Area 3 (SA3) level, as opposed to the previous SA2s, which are larger and hence less precise. In order to assist Providers to locate High Demand Areas the Department has also published an interactive map.
From a personal perspective we believe the SA3 categorisation is fairly ‘coarse’ and sometimes misses local demand hotspots that exist when looking at a smaller SA2 or Local Government Area (LGA). While this new categorisation we speculate, was probably designed to increase efficiencies (save work) and provide the Department more ‘discretion’ (wiggle room) with bed allocations.
We have found that when compared to our office database, which we use for analysis of brownfield development sites, SA3s which are not classified as low need, have LGAs and SA2s within them that carry a significant demand overhang for Places. Therefore an area that is now classified as Category 3 – Moderate Need or Category 4 Low Need might still have areas with a significant demand overhang in it. In particular in the metropolitan areas where population concentrations are particularly dense the SA3 classification might not give and accurate picture of the underlying demand and supply Demography topography.
Operators caught in the middle of such a predicament may well scratch their heads if they are trying to source ACAR places.
An interesting side fact when looking at the nationwide allocation is that several states show significant differences between their theoretical demand for places based on their 70+ years population (we used 65 years from the 2011 ABS census information) and the places actually allocated in this round. Standouts are the Northern Territory and Western Australia which received almost twice as many allocated beds as they would be entitled to when looking at their raw population statistics. Disregarding other criteria that the Department might use for the allocation calculations, this would indicate that these two states/territories have a severe overhang in demand for operational beds. South Australia and Tasmania are on the other end of the scale which, looking at the same numbers, have received significantly less beds than they seem to be statistically ‘entitled’ to. Curious as this may seem, that’s how it appears to work!