29 January 2015
Aged Care - The New Black for Capital Funders
There are currently a range of opportunities for aged care providers presented by increasing consolidation, rising interest from equity investors and growing demand from an ageing population.
Given this rising potential for growth in the sector, it is not surpirising that investment in aged care accommodation is a hot topic. There are several factors underpinning the sector which make it an attractive opportunity.
First, Australia has a high funding safety net for our society. Second, identifiable recurrent income streams exist. Finally, consumer capital funding via refundable accommodation deposits provide internally generated capital for future development.
These attributes are all positive indicators that the aged care sector can offer compelling returns. We have already seen a number of floats in the past year, with the likes of Regis and Japara taking strides to gain further market share.
It is also conceivable that, in the future, we will see players such as health insurance companies expand their service offering and become operators of facilities, such as Bupa has done.
This market expansion and interest offers current aged care providers opportunities to position themselves as "attractive" residential aged care providers.
What are the indicators of an attractive residential aged care operation?
The Bentleys National Aged Care Survey is an industry specific benchmarking tool that collates financial and operational data from a broad cross-section of Australian aged care providers. The diagnostics coming out of the survey focus on outcomes such as income and expense line items, finance and investment costs, and the underlying activity drivers such as staff rosters by staffing level at residential level.
Fincancial indicators and benchmarks common amongst high performing aged care service providers include:
- a strong EBDITA (upwards of around $39 per day);
- net profit margin and return on equity above 10 per cent;
- demonstrable efficiency gains via diluting of overhead costs - such as administration;
- a staffing mix that allows for close monitoring and managing of the ACFI levels for the service, as making appropriate and timely updates to care plans maximises subsidy incomes;
- a care staff to support staff ratio greater than or equal to 3:2. The top operators operate on average with care hours of 2.7 hours per day per resident.
In terms of businesses being investment ready and positioned for growth, there are several key factors to consider.
Being proactive about change: As the industry has been in a state of continual evolution, savvy aged care operators have been focused on internal as well as operational improvements and reforms in recent years. Management teams that have strengthened corporate governance, treasury management, forecasting modelling, and marketing capability are the ones creating real value within their organisations.
Embracing technology as an enabler: Online platform costs and speeding up day-to-day processes. Providers that are embedding technology as part of the efficiency benefits as well as improvements in their bottom line through reduced costs and duplication. For example, use of tablets for bedside record keeping not only provides more efficient care and administration but also facilitates increased use of technology across all aspects of resident care.
Focused on growth options: As Federal Government funding processes change, the best performing providers will be those with long-term growth plans already in place. These will take into account industry consolidation, mergers and aquisitions, and partnering with new types of funding providers.
Providers that are evolving their service delivery, through business operations, embracing innovative technology, catering to client demand and preferences, and tightening their governance models, will strengthen their sustainability in the long term.
For investors looking at the residential aged care sector, building relationships with investor-ready operators will be key to achieving strong returns from a sector that is guaranteed to continue growing into the future.
Source: This article is published in Australian Ageing Agenda Magazine