Investors would think that with the ageing of the population, loading up their portfolio’s with aged care stocks would be a no brainer. Judging how difficult it was to obtain comment from fund managers about the sector, maybe that’s not the case.
The key attractions for investing in aged care are the tailwinds provided by an ageing population. Hugh Dive who is the Chief Investment Officer from Atlas Funds Management says there are currently 4 million Australians aged between 65 and 84 and the Australian Bureau of Statistics forecast that this will increase to 6 million by 2030. He adds he is not an investor in the sector however.
In 2021 the Government spent $24bn on aged care, with the largest spend on residential aged care.
The other attraction to the sector lies with development of new facilities as operators can receive a large amount of their capital back when the first residents enter the facility.
In Australia, there are two remaining ASX listed ‘for profit’ Aged Care providers, Estia Health and Regis Healthcare in addition to ‘not for profits’ such as Calvary Healthcare that took over Japara in 2021.
Theoretically the standard of care should be the same in both the for profit and not for profit sectors as minimum standards of care are regulated. A leading fund manager who spoke on the basis of anonymity said that those facilities that had received sanction notices were from all parts of the sector, which shows no divergence in quality of care between the ‘for profits’ and the ‘not for profits’ or government run facilities.
One major difference between the major players is that the ‘not for profit’ sector does not have to pay payroll tax and do not have to pay income tax. This possibly led to Calvary buying the listed operator Japara and could result in the ‘not for profits’ being able to employ more staff. Fund managers cite this unlevel playing field as a reason for caution for the ASX listed operators.
Government incentives for senior Australian’s to remain in their own home is a threat to the aged care sector as the Australian Government seeks to limit the cost to the Healthcare budget.
The other major risk appears to be the ever changing regulatory environment.
The recent Royal Commission into the sector has recommended a range of changes that are positive and negative, but most likely add to costs for the providers:
- Mandated minimum care hours from October 2023 and a 24/7 Registered Nurse rostering will improve conditions in aged care but also increase costs
- ACAR (Aged Care Approvals Round licencing system) abolition will be a positive when it occurs in June 2024 as the ACAR currently restricts both the number and location of residential aged care places.
- The new Australian National Aged Care Classification which starts in October 2022 will see an increase of $28.20 (per resident per day) in the base rate of funding in return for requiring higher staffing.
Inflation is likely to crimp margins within the aged care sector given that around 75% of revenue is allocated toward employment expenses whereas revenue is largely regulated. Dive says that the sector also faces higher non-wages costs from energy, cleaning to medical devices as well as higher incremental costs from COVID-19. These costs are increasing more swiftly than the increase in government support for aged care, and this has been shown in recent results from ASX listed operators who both reported a first half loss in 2022.
It is always useful to consider global experiences and to this extent Dive highlights that in the US there are 3 large listed nursing home chains and 8 Real Estate investment trusts (REITs) that specialise in nursing/retirement homes. In the US an aged care operator will lease a retirement home from a specialised retirement home REIT. The investment performance of the sector in the US is not dissimilar or probably worse than the experience in Australia. In 2016 giant operator Kindred Healthcare decided to delist from the NYSE, revealing it owed US$423 million in unpaid rent to its landlord Welltower REIT.
Despite the seductive demographics, the high level of changing regulation plus the reliance on government funding for most of the sector makes aged care a challenging sector to derive consistent profits for investors.
This article was written by Mark Draper (GEM Capital) and featured in the Australian Financial Review on 10th August 2022