The following attributes make an investment in the Australian Aged Care Industry particularly attractive:

Underlying Fundamentals

Increasing Older Population

The proportion of Australians aged 65 and above has increased from 9% to 14% between 1970 and 2010 and is forecast to reach 23% by 2050.

An expected decline in the birth rate and continued improvements in life expectancy are driving this trend along with overseas immigration (1.1% in FY13).

This will cause an increased demand for Aged Care Services as a result of the ageing population and growing diversity among older people.

Independence from Economic Cycles

Unlike other industries such as manufacturing or mining, Aged Care is an industry sector that experiences consistent demand even through recessions and times of economic crisis.

The Need for Care

Unlike retirement villages where residents choose to enter for lifestyle reasons, Aged Care Residents do not enter a facility as part of a choice. Their daily requirement for care further underpins the consistent demand for Aged Care in Australia.

The Funding Model

Aged Care is predominantly government funded in Australia. After residents are assessed by a qualified team and have confirmed they need nursing care, they may then be admitted to a government funded Aged Care facility. While the resident usually pays for the accommodation component the much larger care component is funded by the government. This means that approximately three quarters of total revenue is paid by the federal government representing a reliable and secure cash flow, paid monthly in advance to the Operator.

High Profitability

Well managed Aged Care Facilities or Portfolios deliver significantly above average returns on investment (ROI) and even higher returns on equity if bank finance is used. Over the last 24 Months Cooper Newman have sold several facilities with ROIs of over 12.5%.

Best practice, average annual Earnings before Interest Tax Depreciation and Amortisation (EBITDA) on a per bed basis commonly range from $15,000 - $20,000 /per bed p.a.

Opportunity to take bonds

In addition to operational cash flows outlined above, Aged Care Providers may take accommodation bonds from residents. These effectively represent interest free loan payments from the resident to the Operator. While their use is limited, operators are permitted to use them for bank finance reduction and are equally entitled to the interest that these generate, when invested in a term deposit account. Currently bonds may only be charged for “Low Care” beds however from 1st July 2014 bonds can be charged for all beds.

Bond Mechanics on Acquisition

The total refundable bond balance (all bond amounts owed to residents at that time) forms part of total price of a Facility. As it represents an interest free loan from residents however it does not need to be financed on purchase. The purchaser simply steps in and takes over the responsibility for the repayment of the bond liability and will only need to finance the freehold/business component.

Example: $30Mil Total Purchase Price with $18 Mil Bond Pool

Finance Calculation

Purchase Price                                             $30,000,000

Bond Balance                                              -$18,000,000

Staff Entitlements                                             -$350,000

Change Over / Asset Security                    $11,650,000

Banking Ratio                                                          65.0%

Equals a Bank Loan of:                                $7,572,500

Equity required to purchase                        $4,077,500

Based on an average profit level of $1.5Mil ($15,000/bed) EBITDA p.a. this represents a 12.9% ROI and a 36.8% return on equity.

Barriers to Market Entry

The large initial capital investment in combination with the expertise required to run a facility represents a high barrier for new market entrants. Significant Investments (500 beds +) therefore profit from purchasing a large portfolio with an existing management structure in place. This structure may then be used for expansion and growth, either organically by developing facilities or alternatively acquisition of new facilities.

Current Market Conditions

Recently the Aged Care Industry has experienced a real surge in demand and is rapidly evolving from a cottage type industry to a sector increasingly influenced by large corporate groups that are seeking to extend their portfolios. These include long-term existing operators such as Bupa and Domain Principal as well as Venture Capitalist such as Archer Capital and Quadrant Private Equity. Further investment and consolidation is anticipated in what is a maturing industry. (IBIS-World Industry Report Q8601a – Nursing Homes in Australia - June 2013).