The aged care sector has continued to strengthen this year on the back of a very active 2014.
As discussed in recent editions, it’s fair to say that the larger operators are continuing on their path of acquiring existing facilities they view as suitable for their portfolios. This in turn has increased demand all the way down the line to mid-tier operators as well as single operators of small facilities and first time entrants to the industry.
Consolidation also continues to occur in the industry. Several divestments of large portfolios, particularly in the Eastern States have been or are in the process of being transacted.
While acquisitions of existing facilities play a dominant role in most growth strategies a number of operators are putting a greater emphasis on growing ’organically’ via greenfield vertical developments.
For example, BlueCross’s recently opened 150 bed facility Livingstone Gardens, in Vermont South (Melbourne’s Eastern Suburbs) has lifted the benchmark on aged care facilities. Itis a high quality finished, four storey buildwith underground car parking.
Such developments may not be to all residents liking, however it is the way of the future as the continued increase in land values in and around our capital cities necessitatesa vertical build. Certainly your costsrise as you add storeys, but operators may have little choice if they wish to secure prime sites in well-established suburbs where significant accommodation bonds / RADs can be attracted.
The alternative to this may be to head out of townto more fringe locations. Some Sydney based operators‘choose’ to spread their portfolios across Metropolitan Sydney and further out to Western Sydney and beyond for this very reason.
Another approach involves securing existing facilities with surplus land and developing brownfield sites. This involves, demolishing part or all of the existing buildings and building brand new facilities with single ensuite rooms and all other mod cons.
Operators, conscious of continued viability oftheir small facilities,often elect to extend on available land. However, some smaller land locked, older style facilities are not so fortunate. More of these services have continued to cease operationsthis year due to an increasing unviability. As facilities generally become larger, better economies of scale make smaller facilities increasingly unattractive for operators and banks.
The rising costs of compliance and general running costs are also central factors for these small services. Newer aged care developments with larger rooms, private ensuites and other facilities such as cinema’s, kitchenettes etc are often more attractive to residents and their families. In the case of a “close down”of smaller or older style facilities, the Approved Places are typically sold and relocated to another service with the land component sold in a separate transaction.
A report prepared by KPMG in 2013 mentioned the Department of Health & Ageing (as it was known then) reference to the industry requiring to build an additional 74,000 places by 2025. So we can expect more of these vertical builds as well as more the traditional approaches to aged care.
Whether this amount of beds will actually materialise over the next 9 or so years is worthy of some debate. No doubt many providers have carefully considered the relevant demographics in their respective localities and when their resident populations will peak, then begin to plateau and eventually fall.The trend for people utilising home care services and delaying entry into residential aged careshould also not be forgotten in forecasting future demand.
Report on the residential aged care sector (prepared by KPMG for the Aged Care Financing Authority July 2013)
2015, like the 2014 has again seen an increase in prices for Approved Places across most States of Australia and in particular in Victoria. Prices have increased from where they were a few years back. Queensland and Victorian prices are roughly on par currently. Places in New South Wales continue to trade well. Similarly in South Australia, prices remain strong (if you can get your hands on Places!), in what is a particularly tightly held market.
Farewell to Mitch’s Dream?
During several of our bed licence marketing campaigns over the last 18 months we have been contacted by interested parties expressing their concern over the possible deregulation of the Approved Places Market. The genesisfor this concern was the former Assistant Minister Senator Mitch Fifield. The Minister’s policy preference was again confirmed in his speech, at the ACSA IAHSA joint International Conference in Perth on 2ndSeptember 2015 where hestated he would “…love, love, love, to get rid of ACAR altogether…’’ in line with the recent termination of any future funding rounds for Home Care Places post 2017.
The driver for this philosophical model, according to Mitch Fifield is …”what is going to drive change, what is going to drive standards and quality isn’t regulation, it is ultimately going to be competition. And I think that competition is really driving a change in behaviour, savvy providers can only benefit from the shift to consumer care and the flexibility that that will bring…”
What is not clear is what did the former Assistant Minister really mean with this statement. It is hard to see the correlation between greater competition to attract residents and resident care standards.
How is this different to what happens in practice today under the current policy, where a resident’s family shops around to see what is available in service and cost to the Ministers wish for ?
Importantly though, did the Assistant Minister clarify what this getting rid of ACAR altogether would mean, i.e. are we replacing the current ACAR process with different one or are we deregulating the market altogether with no further requirement by providers to apply for Allocated Places? The answer is NO,he did not clarify anything. Did the Assistant Minster provide an insight to his vision of the future of the Aged Care Industry without ACAR? No, nothing past the formation of the Aged Care Sector Committee which were supposed to provide advice to Assistant Minster Fifield by the end of the year.
What Assistant Minster Fifield may not appreciate is the uncertainty that the above statements with a lack of alternatives create. Anyone following the share market knows that uncertainty is the worst thing for business investment. Stakeholders are unable to plan for the future and therefore tend to put investment decisions on hold. In our case these ‘stakeholders’ were providers who wanted to expand their Aged Care Services by acquiring more beds in the secondary market with suddenly no certainty that their substantial financial investment would be worth anything in the near future. When your agenda is to increase Aged Care Services to face an ageing society, creating uncertainty with substance-lacking statements doesn’t quite seem the right thing to do.
In his defence, Senator Fifield did state that “… we are not going to rush headlong into anything…’’ what a relief!
So now we have a new Minister and find ourselves stuck in limbo again waiting to hear how The Honourable Susan Ley MP, Minister for Health, Minister for Aged Care and Minister for Sport would like to tackle Aged Care Problems her way. Ken Wyatt, has been elevated to Assistant Health Minister and may share the aged care load with Minister Ley.It seems that the only certainforce to drive quick and consequential change in Aged Care remains Treasury.
Notwithstanding the above we have experienced great demand for Allocated Places in the secondary market for all the campaigns we have conducted in the previous 18 months, which has endured right into the current founding round. This leads us to believe that most operatorsare confident the status quo will continue and this is what they have based their investment decisions on.
From the Analyst’s Desk
After three successful IPOs last year and with the first financial year completed as publicly trading companies I believe it is worthwhile having a quick glance at the three public players Estia, Japara and Regis.
A quick refresher: Japara floated* on the 24th April last year followed by Regis on the 14th October and finally Estia on the 11th of December.
Regis was the largest entity with4,719 operational beds at their Initial Public Offering (IPO). This was followed by Estia with 3,203 beds which had only recently grown to this size after their merger with Padman Health Care (1,074 beds) and Cook Care (766 beds) a few months prior. Japara was the smallest provider with 2,994 operational beds at their IPO date.
Both Japara and Regis began trading at a premium to their Issue Price ($2.00 and $3.65 respectively) with only Estia taking a hit on their commencement of trading (issue price $5.75). However, as at the time of writing all companies are trading at a premium of approx. 20% for Estia and approx.45% for both Regis and Japara, when compared to their original issue price.
Results for the financial year ending 2015 of all three were largely in line with expectations and projections but I did find one thing worth mentioning and that is the amount of beds that each provider has grown by since their IPO. In order to keep things simple I have only looked at operational beds as each provider typically have greenfield and brownfield developments in the pipeline at any given time. As at 30th of June 2015 Regisremains the largest operator by bed numbers having grown their operational beds to 5,034 which presents a 6.7% increase since their IPO, Japara slightly surpassed this number with 7.1% operating 3,207 beds at the end of the 2015 financial year. The cake however was taken by Estia, who seem to have continued their aggressive growth strategy and grown to 4,010 beds, an impressive 25% increase since their IPO less than seven months prior. This growth looks even more astounding when taking into consideration that Estia had the shortest time in the public market to achieve this result. A tremendous achievement for CEO Paul Gregerson and his team.
Another point worth highlighting is the companies’ operating profit measured in Earnings before Interest, Tax, Depreciation and Amortisation or EBITDA. For simplicity’s sake and to adequately benchmark I have used Regis’ and Estia’s pro-forma EBITDA which does not include the costs of their IPOs (one off). As Japara floated in the 2014 financial year their statutory/actual EBITDA can be used for this purpose.
A word of caution in advance as the results are to be taken with a grain of salt. We have already established that all three operators have acquired and developed beds over the specified period. These newly built/acquired beds would not have operated for the entire period and could therefore dilute the overall per bed profitability.
The results leave Regis as the most profitable with $18,600 EBITDA per bed (June 2015 bed number) followed by Estia at $17,400/bed and Japara $15,800/bed.
Another interesting set of facts is the Enterprise Value / EBITDA multiples that the three companies trade on. Enterprise Value or EV in finance jargon is the common parameter for publicly listed companies as it represents a good indicator for the real cost of a takeover/acquisition while the EV / EBITDA multiple gives a good indication on the value to profit ratio similar to yields (cap rates) or multiples in any other investment. If any of these terms seems unfamiliar to you, have a browse through the analyst section of our previous newsletters. They can be found on our website. The calculation of the EV is quite simple being the Market Capitalisation (Number of issued shares multiplied by the share price) plus debts and less cash. Strictly speaking bond balances would form part of a company’s debt, however given that their unique attributes as an interest free loan from the resident that is commonly rolled over from old resident to new resident and given our treatment of bond balances in non-corporate transactions (see March 2013issue) I have not taken bond balance into account during my EV calculation.
The resulting EV/EBITDA multiples as at 30th June 2015 as well as the EV per beds can be seen in the table below. I leave the interpretation of the same to you.
Multiples: EHE 16.4, JHC 13.4, REG 16.7
EV per Bed EHE $403K, JHC $313K. REG $450K
So where to from here.
In my humble opinion the strategies will continue to focus on fast and sustainable growth in a market that, when compared to others, has a lot more room for consolidation. With full war chests behind them all three companies will continue to acquire and develop in order to stay ahead. Japara alone is currently developing 1,000 beds, of which they are planning to have 805 operational by FY19. No doubt this number will be complemented by acquisitions of additional facilities as well. Estia is planning to add 500-1,000 beds per annum via acquisitions, a number that they have already proven to take very serious. This will also be supplemented by greenfield and brownfield developments. Regis has 946 places under construction in FY16 of which it is planning to have a net additional of 207 operational by the end of this financial year.*traded of shares on the ASX on a normal settlement basis
Alternatively give me a call on 03 9831 9898 for a chat: Phil Kadletz.