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1
“IN A NUTSHELL ”
A CHANGE OF SEASON
ASX Listed Aged Care Company Performance
Summary – Year End 30 June 2018
SEPTEMBER 2018
1
1. INTRODUCTION
The three listed providers have held tight in a storm of subsidy cuts, policy change and rising operational
costs. It has been a time for consolidation and internal strengthening during one of the toughest periods
we have seen in the industry. With the Aged Care Funding Instrument (ACFI) indexation freeze now
relaxing and a Federal election looming, the sector should start to expect some performance
improvements over the next 12 to 18 months.
As projected, the performance results were flat (or worse), but challenging times can bring about
opportunity and each of the providers have used this difficult time to make the most of it:
Japara has focused on roster efficiency and capital developments, while successfully acquiring
and stabilising a distressed portfolio;
Estia has progressed with its development/refurbishment program; and
Regis opened 4 new premium homes within an environment of slowing capital investment.
We can still expect flat performance in the short term, but these initiatives will pay dividends in the
medium and longer term. Furthermore, the Government’s heavy-handed care compliance regime is
producing more acquisition opportunities. Like Japara’s Riviera acquisition, these activities involve
distressed assets that sell for much less than historic purchases, but carry substantial compliance risk.
Larger operators like the listed providers are better equipped to manage the heavy turnaround
investment required to mitigate this risk.
A new set of aged care standards will be mandatory from 1 July 2019 and many providers will leave
their preparations until the last minute, resulting in further compliance issues and acquisition
opportunities next year (refer to our article on the New Aged Care Quality Standards). We can expect
that sector consolidation will be accelerated through this process and the listed operators will find
opportunities to grow quickly.
The period also reveals clearer signals of a change in sector funding. Our previous reports have
demonstrated a movement away from Resident Accommodation Deposits (RADs) to Daily
Accommodation Payments (DAPs). The admission intake in this reporting period confirms our
predictions that RAD funding is likely to decline proportionally over time.
In this In a Nutshell – we explore the reasons for this paradigm and the opportunity presented to providers
and financiers prepared to adapt ahead of this change.
2
2. FINANCIAL RESULTS
The following provides a summary and high level analysis of the Year End 30 June 2018 results:
30 JUNE 2018 RESULTS SUMMARY REGIS ESTIA JAPARA
Facilities FY18 (No.) 60 68 48
Facilities FY17 (No.) 54 68 43
Operational Beds FY18 (No.) 6,753 6,046 4,069
Operational Beds FY17 (No.) 6,029 5,909 3,841
Occupancy FY18 (%) 93.4% 94.2% 93.1%
Occupancy FY17 (%) 94.9% 93.5% 94.5%
Market Capitalisation ($ millions)1 1,004 803 473
PROFIT & LOSS
EBITDA FY18 ($ millions)2 117.1 90.0 47.4
EBITDA FY17 ($ millions)2 123.6 85.5 52.2
EBITDA Margin FY18 (%)2 19.7% 16.4% 13.1%
EBITDA Margin FY17 (%)2 21.9% 16.5% 14.8%
Profit Before Tax FY18 ($ millions) 76.8 57.2 29.7
Net Profit After Tax FY18 ($ millions) 53.9 41.2 23.3
Basic EPS FY18 (cents) 17.9 15.8 8.8
Basic EPS FY17 (cents) 20.3 18.2 11.2
BALANCE SHEET
Net Current Assets3 ($ millions) (133.7) (54.5) (71.5)
Net Assets ($ millions) 180.4 761.6 533.8
Cash at Bank ($ millions) 7.8 11.2 29.2
Goodwill & Other Intangibles ($ millions) 260.5 820.6 260.7
Resident Places (Intangibles) ($ millions) 217.9 215.2 230.6
RAD Liability ($ millions) (945.2) (791.5) (487.0)
External Debt ($ millions) (411.6) (75.0) (145.5)
Net Debt ($ millions) (403.8) (63.8) (116.3)
Source: Investor Presentations and Financial Statements 1 Market Capitalisation based on closing balance on 4 September 2018
2 EBITDA figures have been normalised to exclude acquisition related costs, increase in fair value of investment property, gains/discounts on acquisitions and
gain/losses on disposal of non-current assets 3 Excludes RAD Liability
3
Source: Investor Presentations, Financial Statements and StewartBrown Residential Care Report – March 2018.
* StewartBrown Figures represent March 2018 results.
.
Estia has been able to maintain occupancy levels and Japara’s occupancy levels
have markedly improved from the first half of FY2018. After experiencing a
drop in the first half of FY2018, Regis occupancy levels have marginally
improved. Overall, all three operators report lower occupancy levels
compared to the StewartBrown top quartile and Japara and Regis remain
slightly below industry average.
OCCUPANCY TREND
In line with previous guidance released by the listed providers, EBITDA per bed
per annum results have declined or remained steady. This downward trend
has continued since FY2016, and with the exception of Regis, the results are
below top quartile performers as per StewartBrown. Funding pressure,
occupancy and rising staffing costs have driven this declining performance.
EBITDA PER BED PER ANNUM
Source: Investor Presentations, Financial Statements and StewartBrown Residential Care Report – March 2018.
Note: ASPL calculate the above figures on a weighted per bed basis and use normalised EBITDA figures.
* StewartBrown Figures represent March 2018 results.
$20,100 $18,800
$15,700
$20,600
$14,700 $13,800
$18,200
$15,000
$12,100
$18,300 $17,600
$-
$5,000
$10,000
$15,000
$20,000
$25,000
REGIS ESTIA JAPARA StewartBrownTop Quartile
EBIT
DA
PER
BED
PER
AN
NU
M (
$)
FY16 FY17 FY18 FY17 YTD Mar-18
90%
91%
92%
93%
94%
95%
96%
97%
98%
FY16 HY17 FY17 HY18 FY18
REGIS ESTIA JAPARA StewartBrown TQ* StewartBrown Average*
4
TOTAL STAFF COSTS AS A PERCENTAGE OF REVENUE
As stated in our last update, Regis and Japara reported occupancy issues due
to the influenza and gastro outbreak in the first quarter of last year. According
to StewartBrown industry averages, the magnitude of this impact was not as
prevalent.
Japara’s workforce optimisation program has improved staff costs in the
second half of FY2018, which is in line with previous guidance. The rise in Regis’
staff expenses reflects the decision to insource catering costs with a reported
reduction in total expenditure. Estia’s staff costs as a percentage of revenue
have slightly increased which reflects the Enterprise Bargaining Agreement
(EBA) increases and against low funding growth.
Occupancy levels and staff costs may also be impacted by the trade up of new
homes in FY2018. Regis opened four new homes, Estia opened two new
homes and Japara opened a new home and extended two existing homes.
During the trade up of a new home, staffing levels are generally less efficient
than a fully operational home. They are also higher to reflect the level of
training and personnel required to ensure appropriate systems and processes
are in place to minimise potential clinical and governance risks. We expect staff
costs to remain steady or increase with the introduction of the new aged care
quality standards.
Source: Investor Presentations
63%65%
70%
67%66%
70%
58%
60%
62%
64%
66%
68%
70%
72%
REGIS ESTIA JAPARA
FY17 FY18
5
Government revenue levels have remained steady for Japara and Regis which
reflects the indexation freeze and changes to scoring in the Complex Health
Care domain for ACFI. We expect to see an improvement as indexation freezes
relax. Estia’s modest subsidy increase reflects higher resident acuity which
drives higher subsidies and supplements.
The marginal government revenue increases for the listed providers will also
reflect the level of investment in new homes, refurbishing existing homes and
higher levels of supported residents. Providers are able to receive a higher
accommodation supplement for supported residents in new or significantly
refurbished homes.
Nearly 60% (35 facilities, net of Club Facilities) of Regis facilities qualify for the
higher significant refurbishment supplement. Estia and Japara are continuing to
increase the number of homes that are eligible. Estia now has 19 facilities
eligible, compared to only 12 in FY2017. Similarly, 21 of Japara’s homes are now
eligible, a marked increase from the 10 homes that were eligible in FY2017.
This ongoing investment is essential to improve revenue and to meet current
and future consumer expectations.
The ability to increase resident revenue has been limited by the court ruling on
asset replacement charges as well as the Department’s position on charging
additional services. We expect to receive additional guidance on additional
services which will be crucial as providers prepare for the next generation of
residents and a consumer directed care model.
3. RE VENUE
REVENUE PER OCCUPIED BED PER DAY
Source: Investor Presentations
$197 $198 $193 $197 $198 $199
$84 $85 $68 $70 $77 $77
$-
$50
$100
$150
$200
$250
$300
FY17 FY18 FY17 FY18 FY17 FY18
REGIS ESTIA JAPARA
REV
ENU
E
Government Income POBD Resident & Other Income POBD
Revenue per occupied bed per day (POBD) for all three providers has remained
steady since FY2017.
There are two main components of government funding. Firstly, there is the
basic care subsidy known as the Aged Care Funding Instrument (ACFI).
6
4. RESIDENT PROFILE
One of the most significant trends that providers are experiencing is a change in
resident profile. As evident in the graph below, the three listed providers have
experienced an increase in the number of supported residents and
corresponding decline in non-supported residents. Whilst supported residents
attract an accommodation supplement, and thereby increase operating income,
this movement implicates the ability for providers to receive potentially higher
accommodation payments through either Refundable Accommodation Deposits
(RADs) or Daily Accommodation Payments (DAPs).
An analysis of non-supported resident payment preferences has indicated that
across the three providers and the wider industry there is a movement away from
RAD paying residents. At the industry level, this change is more pronounced, with
non-supported residents increasingly electing to pay a DAP. With the Department
estimating an investment requirement of $54 billion over the next 10 years, it will
be important to monitor this trend and its implication for sector funding.1 Refer
to Section 6 for further analysis.
RESIDENT PAYMENT PROFILE
Source: Investor Presentations
48% 46%56% 54% 55% 53%
43% 45%
43% 45% 41% 42%
9% 9%1% 1% 4% 5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY17 FY18 FY17 FY18 FY17 FY18
REGIS ESTIA JAPARA
NON-SUPPORTED SUPPORTED OTHER
1 ACFA Fifth report on the Funding and Financing of the Aged Care Sector July 2017
7
Source: Investor Presentations and ACFA Sixth Report of Funding and Financing the Aged Care Sector, July 2018
*Note, FY2018 information not available.
Growth in the average incoming RADs have also begun to slow. Despite opening
four new facilities in FY2018, Regis’ average incoming RAD has only increased
by 3% since the prior year. Estia has experienced slightly higher growth of 5%
over the year, whilst Japara experienced a decline, with the average incoming
RAD decreasing to $323,900 from $351,700 in the second half of FY2017.
NON-SUPPORTED RESIDENT PAYMENT PREFERENCES FY17 AND FY18
68% 67%61% 59% 56% 55%
41% 38%
10% 9% 22% 21% 27% 26%
35% 40%
22% 24%17% 20% 17% 19% 24% 22%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY17 FY18 FY17 FY18 FY17 FY18 FY16 FY17
REGIS ESTIA JAPARA ACFA*
RAD DAP COMBINATION
AVERAGE INCOMING RAD, FY16 TO FY18
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
FY16 HY17 FY17 HY18 FY18
AV
ERA
GE
INC
OM
ING
RA
D
REGIS ESTIA JAPARA
Source: Investor Presentations
8
5. SHARE PRICE TREND
Share prices for the listed aged care providers have remained relatively steady
throughout the year. Since the release of their FY2018 results, Japara and
Regis experienced a small decline and Estia share prices slightly increased.
SHARE PRICE TREND JANUARY 2018 TO SEPTEMBER 2018
Source: Yahoo Finance
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
AD
J. C
LOSI
NG
SH
AR
E P
RIC
E ($
)
REGIS ESTIA JAPARA
9
6. SECTOR FINANCING
As outlined in Section 4, we are seeing a change in the mix of RAD, DAP and
Combination payments which is starting to show in the cash flows.
We have seen a dramatic increase in lump sum deposits from residents
following the Living Longer, Living Better (LLLB) reforms introduced in July
2014. A large proportion of the sector’s developments have been supported
by resident lump sum payments. At 30 June 2017 the Commonwealth reports
aggregate deposits of almost $25 billion (which is underwritten by the Federal
Government).
An incoming resident has the option of payment method, and more are
electing daily payments over lump sums. The ACFA 2018 report revealed a 19%
increase in the number of people electing to pay a DAP in metropolitan homes
in the 2017 financial year, which is a material shift away from RADs and
Combinations. The results of the listed entities suggest that this trend is
continuing (see below).
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1H FY16 2H FY16 1H FY17 2H FY17 1H FY18 2H FY18
NET
RA
D I
NFL
OW
PER
BED
($
)
WEIGHTED AVERAGE NET RAD INFLOW FOR ALL THREE PROVIDERS
Source: Calculated based on net RAD cash flow and operational beds per Investor Presentations and Financial Reports.
10
In the future, we expect there will be a continued slowing of net RAD inflows per
bed when compared to recent years. There are several reasons for this:
1. Reform Normalisation – The 2014 reforms enabled providers to charge RADs for
a consumer group that were not eligible to pay lump sums under the old system. As
new residents were admitted post 1 July 2014, un-bonded places were filled with
RAD paying residents and this resulted in the dramatic inflow of deposit funds into
the sector. However, with an average length of stay of less than 3 years, most new
residents will now be replacing residents that entered under the new regime.
2. Payment Preferences – Section 4 demonstrates that non-supported resident
payment preferences have been shifting from RADs to DAPs and Combination
payments. Supported resident levels have also increased in recent years. We are
seeing more departing RAD paying residents are being replaced by new residents
that are paying DAPs, Combinations or Government daily subsidies (supported
residents).
3. Competition – The LLLB reforms initially had the desired impact of stimulating
investment in residential aged care. Access to RAD capital helped to facilitate new
developments and refurbishments across the country. Consumers have enjoyed
better access to higher quality accommodation and expectations have risen. In
some areas, this new supply has resulted in greater competition and many
providers are having to adjust pricing to maintain occupancy.
4. Property Prices – RAD values are closely linked to house prices, which have shown
signs of slowing after record growth across the Victoria and New South Wales
markets. Lower residential sales values and slower turnover will have a flow on
affect for RADs and payment elections.
RADs have traditionally been preferred as a low cost means of financing new
developments, however, many of our clients now prefer DAP payments. The DAP
represents a return of just under 6% of what would have been paid on the RAD (and
increases in line with interest rates). Because the RAD is normally well above the
cost of construction per bed of the home, this usually represents a strong return on
investment.
However, a sector-wide change in funding arrangements needs to be carefully
managed, particularly given that some providers in Australia are heavily RAD
dependent and maintain limited liquidity based on historic RAD/Bond cash flow
requirements.
Over the past six months, we have been working with the major banks to address
this potential longer-term shift in sector funding. Most financiers are accustomed
to the repayment of a large portion of development finance as residents enter the
new facility. We believe that there may be an even greater opportunity for banks to
contribute to future investment through longer term core debt.
11
7. CONCLUSION
It has been a pretty rough winter all round for the listed providers and there
are still some difficult times ahead.
However, the Commonwealth has achieved its Budget saving targets through
ACFI cuts and the indexation freeze. We expect that funding levels should
reach closer alignment to cost escalation in the 2019/20 financial year. With
some targeted lobbying ahead of the election, the industry should be able to
encourage greater Government support for the aged care industry.
The Government’s 2016 aged care funding cuts have also triggered a marked
slowdown in capital investment across the country. At the same time, the
supply of home care alternatives remains tightly constrained. These influences
will strengthen demand for residential aged care in the medium term and this
will advantage the listed operators with their newly refurbished and expanded
portfolios.
They must still navigate changing resident payment patterns in readiness for
acquisition opportunities and continued developments. We believe the
greatest consolidation opportunities will present over the next 12 months.
12
ABOUT “IN A NUTSHELL” To help busy executives in a rapidly changing aged care world, Ansell Strategic provides summaries and high level commentary on new developments in the industry. Detailed reports are provided on our website at www.ansellstrategic.com.au.
FOR FURTHER INFORMATION, PLEASE CONTACT:
CAM ANSELL Managing Director Telephone: (08) 9468 7520 Email: [email protected]
AMBER CARTWRIGHT Manager - Advisory Telephone: (08) 9468 7527 Email: [email protected]
ANSELLSTRATEGIC.COM.AU
Please note the information provided in this report does not constitute or purport to be formal financial advice.