First things first:
As most of you are well aware by now, we have re-branded and now call ourselves Amicum – Aged Care & Retirement Living Specialists. All existing services of the former Cooper Newman Retirement Living and Cooper Newman Aged Care departments are now covered under the AMICUM brand. For more information please feel free to visit our new website at www.amicum.com.au.
The re-branding was also the reason for the fact that you did not hear from us last autumn. Amongst changing the name, design, website and database we were considering changing out bi-annual newsletter to a blog, which we have refrained from for the time being.
The market has turned
In late August we sent out a news wire that the Aged Care market appeared to have turned for the better in activity and values. The reason for this was that up until the second quarter of 2017 the market seemed to go through a consolidation period with limited interest and demand after the bullish market in 2015.
2016 marked an average year where each project that we initiated was met with very limited demand from buyers. As stated in our last edition the market was consolidating the recent activity and price gains with operators also trying to assess the effect of the announced funding cuts. Very few operators were looking to add to their portfolios especially at the price levels of 2015.
In 2016, the result from this limited interest from buyers during the sales process has a detrimental effect on the sales prices and also the time required to complete the transaction. Naturally in a more bearish market, sales tend to drag out while finessing the sales terms, arranging finance and executing contract documentation. This can be a very testing environment for vendors, buyers and agents and this is where a lot of experience and skill is required to get a project over the line with a satisfactory result for the vendor.
With the initiation of new projects in the second quarter of 2017 we noticed an immediate difference in buyer interest as soon as the projects were presented to the market. Without any specific reason we could identify, all of a sudden we had far more parties expressing interest than expected and at higher levels of value than expected. This was confirmed when we received offers even in the initial stages of a campaign and it was clear that the market seemed to have turned from its previous bearish lull.
This development has continued, with an increasing number of parties, both existing and new operators having registered their interest with us for aged care assets. In our professional opinion this is a good development as growth of the much-needed Aged Care sector will be driven by underlying economics.
Does it have to be “going concern” sale?
While going concern sales (the freehold and business) have been our most common type of sale of aged care facilities, in the last 18 Months, also saw us conclude several “component” sales.
With modern facilities now being well in excess of 80 beds and all singles with ensuites some of the older Homes of 45 beds or less with multiple bed wards and shared ensuites or communal bathrooms find it increasingly hard to stay economically viable and attract residents.
Historically when older style operating facilities, closed their business due to the building being physically obsolete, they have tended to re-located residents staff and residents before divesting their assets. Most operators see this type of sale as a last option and with sincere concerns of the process of having to re-locate staff and residents and the sell the assets separately.
However our experience has shown that with good project management in place this process can run very smoothly for all stakeholders. In addition, the current high values of bed licences and the underlying residential value of the freehold can often provide the vendor with a superior result than trying to force a going concern sale.
A faint pulse
Back in the middle of 2015, in a midst all the IPO hype we wrote an article in our October 2015 Newsletter on the three recently listed companies Estia (EHE), Japara (JHC) and Regis. After the decline in share prices for most of 2016 and a prolonged period of silence in the corporate part of the sector it appears that things are stirring again.
On 24th October newly listed Moelis Australia (MOE.ASX) announced that they had acquired a 9.96% interest worth about $50Mil at the time in Japara. At an average price of $1.90 this equates to approximately $150,000 per operational bed. Just looking on a per operational bed basis this presents about a 20% discount for where we would value an operational bed in the current market and does not even include Japara’s development assets of roughly 1,100 beds. In our professional opinion this was a sound investment by Moelis proving that they have a high regard for fundamentals over current market sentiment.
Since then Japara and Estia have been showing steady improvements in their share price, being up approximately 10% since late October and at the time of writing. Interestingly and without getting into too much detail there appears consistent institutional interest for in both companies since the announcement of the acquisition by Moelis and even earlier for Estia.
Even more interesting is the fact that Regis has pretty much traded sideways over the same timeframe and very much appears to be the laggard in the industry. The reason for this might very well be the fact that as at 30th June 2017 it was the most expensive of the three Providers when looking at it from an Enterprise Value per operational bed point of view.
Where to from here? With our crystal ball in for a service our money would be on a slow up grind from here: Up because our assessment model still puts the value of Estia and Japara at above current share price values, in particular when looking at their respective development pipelines. And slow because usually stocks that have been beaten so hard previously face a lot of resistance on their next leg up. This is due to many shareholders who are still holding to their accumulated book losses have sworn to get out once it hits a particular price (usually where they purchased the stock themselves before it dove). Hence there will be a lot of selling pressure or supply on the way up. Time will tell.
ACAR 2017
Somewhat surprisingly, there was no announcement of ACAR late this year. There were several clues from Minister Wyatt’s office that he was not happy about the current arrangement with the allocation of ACAR AIPs. Specifically, operators not delivering the facilities in a reasonable time frame, or not securing sites and obtaining Development Approval.
In addition to the above, apparently a major irritant to the Minister is the issue of AIPs being sold where no construction has been undertaken. We understand that this is being reviewed now and may well be address in the next ACAR.
Watch this space
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.
ACAR
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!
Please feel free to contact John Newman on 03 9831 9898 or john@amicum.com.au for more information.