19 August 2015
Work Your Capital
For most boards, discussions right now are largely focused on how the reforms in aged care are being ‘felt’ at the service level. The questions being asked include: “how will we address these impacts?” and “what can we do to underpin our long term sustainability?”
The answers to these questions are presenting numerous options for providers moving forward, such as tele-health; capital efficient hub and spoke models; and a refined focus on use of capital, including financial capital.
In assessing capital management stratetgies, it is important to consider the cost of capital and its impact on ROI.
Cost of capital
Getting the best ROI for significant refurbishment projects relies on weighing up financing options, particularly in terms of the cost of capital.
The cost of capital (a single point number to use to compare different projects - like significant refurbishment, new builds, re-builds, green fields, brown fields, etc.) must be a key consideration for aged care providers throughout strategic planning and project development.
What appears to be marginal differences in cost of capital rates can make a significant difference when applied to multimillion dollar projects.
Cost of capital differs across the different options for financing. The two key options for financing for aged care have different associated costs: bank debt or consumer debt (bonds, refundable accommodation deposits).
- Bank debt: The spread of cost of bank debt recorded in the most recent Bentleys National Aged Care Survey indicates an average cost of capital of around 5.7%, with a risk margin of a little over 3% on average.
- Consumer debt: Refundable Accommodation Deposits(RADs) and accommodation bonds don’t have an associated interest rate, but the Maximum Permissible Interest Rate (MPIR) (where you switch over from a capital account to a revenue item) is approximately 6.7%. There are also acquisition costs for sourcing this capital – so the cost of capital for consumer funding could be up to 7%.