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“IN A NUTSHELL ”

A CHANGE OF SEASON

ASX Listed Aged Care Company Performance

Summary – Year End 30 June 2018

SEPTEMBER 2018

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1. INTRODUCTION

The three listed providers have held tight in a storm of subsidy cuts, policy change and rising operational

costs. It has been a time for consolidation and internal strengthening during one of the toughest periods

we have seen in the industry. With the Aged Care Funding Instrument (ACFI) indexation freeze now

relaxing and a Federal election looming, the sector should start to expect some performance

improvements over the next 12 to 18 months.

As projected, the performance results were flat (or worse), but challenging times can bring about

opportunity and each of the providers have used this difficult time to make the most of it:

Japara has focused on roster efficiency and capital developments, while successfully acquiring

and stabilising a distressed portfolio;

Estia has progressed with its development/refurbishment program; and

Regis opened 4 new premium homes within an environment of slowing capital investment.

We can still expect flat performance in the short term, but these initiatives will pay dividends in the

medium and longer term. Furthermore, the Government’s heavy-handed care compliance regime is

producing more acquisition opportunities. Like Japara’s Riviera acquisition, these activities involve

distressed assets that sell for much less than historic purchases, but carry substantial compliance risk.

Larger operators like the listed providers are better equipped to manage the heavy turnaround

investment required to mitigate this risk.

A new set of aged care standards will be mandatory from 1 July 2019 and many providers will leave

their preparations until the last minute, resulting in further compliance issues and acquisition

opportunities next year (refer to our article on the New Aged Care Quality Standards). We can expect

that sector consolidation will be accelerated through this process and the listed operators will find

opportunities to grow quickly.

The period also reveals clearer signals of a change in sector funding. Our previous reports have

demonstrated a movement away from Resident Accommodation Deposits (RADs) to Daily

Accommodation Payments (DAPs). The admission intake in this reporting period confirms our

predictions that RAD funding is likely to decline proportionally over time.

In this In a Nutshell – we explore the reasons for this paradigm and the opportunity presented to providers

and financiers prepared to adapt ahead of this change.

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2. FINANCIAL RESULTS

The following provides a summary and high level analysis of the Year End 30 June 2018 results:

30 JUNE 2018 RESULTS SUMMARY REGIS ESTIA JAPARA

Facilities FY18 (No.) 60 68 48

Facilities FY17 (No.) 54 68 43

Operational Beds FY18 (No.) 6,753 6,046 4,069

Operational Beds FY17 (No.) 6,029 5,909 3,841

Occupancy FY18 (%) 93.4% 94.2% 93.1%

Occupancy FY17 (%) 94.9% 93.5% 94.5%

Market Capitalisation ($ millions)1 1,004 803 473

PROFIT & LOSS

EBITDA FY18 ($ millions)2 117.1 90.0 47.4

EBITDA FY17 ($ millions)2 123.6 85.5 52.2

EBITDA Margin FY18 (%)2 19.7% 16.4% 13.1%

EBITDA Margin FY17 (%)2 21.9% 16.5% 14.8%

Profit Before Tax FY18 ($ millions) 76.8 57.2 29.7

Net Profit After Tax FY18 ($ millions) 53.9 41.2 23.3

Basic EPS FY18 (cents) 17.9 15.8 8.8

Basic EPS FY17 (cents) 20.3 18.2 11.2

BALANCE SHEET

Net Current Assets3 ($ millions) (133.7) (54.5) (71.5)

Net Assets ($ millions) 180.4 761.6 533.8

Cash at Bank ($ millions) 7.8 11.2 29.2

Goodwill & Other Intangibles ($ millions) 260.5 820.6 260.7

Resident Places (Intangibles) ($ millions) 217.9 215.2 230.6

RAD Liability ($ millions) (945.2) (791.5) (487.0)

External Debt ($ millions) (411.6) (75.0) (145.5)

Net Debt ($ millions) (403.8) (63.8) (116.3)

Source: Investor Presentations and Financial Statements 1 Market Capitalisation based on closing balance on 4 September 2018

2 EBITDA figures have been normalised to exclude acquisition related costs, increase in fair value of investment property, gains/discounts on acquisitions and

gain/losses on disposal of non-current assets 3 Excludes RAD Liability

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Source: Investor Presentations, Financial Statements and StewartBrown Residential Care Report – March 2018.

* StewartBrown Figures represent March 2018 results.

.

Estia has been able to maintain occupancy levels and Japara’s occupancy levels

have markedly improved from the first half of FY2018. After experiencing a

drop in the first half of FY2018, Regis occupancy levels have marginally

improved. Overall, all three operators report lower occupancy levels

compared to the StewartBrown top quartile and Japara and Regis remain

slightly below industry average.

OCCUPANCY TREND

In line with previous guidance released by the listed providers, EBITDA per bed

per annum results have declined or remained steady. This downward trend

has continued since FY2016, and with the exception of Regis, the results are

below top quartile performers as per StewartBrown. Funding pressure,

occupancy and rising staffing costs have driven this declining performance.

EBITDA PER BED PER ANNUM

Source: Investor Presentations, Financial Statements and StewartBrown Residential Care Report – March 2018.

Note: ASPL calculate the above figures on a weighted per bed basis and use normalised EBITDA figures.

* StewartBrown Figures represent March 2018 results.

$20,100 $18,800

$15,700

$20,600

$14,700 $13,800

$18,200

$15,000

$12,100

$18,300 $17,600

$-

$5,000

$10,000

$15,000

$20,000

$25,000

REGIS ESTIA JAPARA StewartBrownTop Quartile

EBIT

DA

PER

BED

PER

AN

NU

M (

$)

FY16 FY17 FY18 FY17 YTD Mar-18

90%

91%

92%

93%

94%

95%

96%

97%

98%

FY16 HY17 FY17 HY18 FY18

REGIS ESTIA JAPARA StewartBrown TQ* StewartBrown Average*

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TOTAL STAFF COSTS AS A PERCENTAGE OF REVENUE

As stated in our last update, Regis and Japara reported occupancy issues due

to the influenza and gastro outbreak in the first quarter of last year. According

to StewartBrown industry averages, the magnitude of this impact was not as

prevalent.

Japara’s workforce optimisation program has improved staff costs in the

second half of FY2018, which is in line with previous guidance. The rise in Regis’

staff expenses reflects the decision to insource catering costs with a reported

reduction in total expenditure. Estia’s staff costs as a percentage of revenue

have slightly increased which reflects the Enterprise Bargaining Agreement

(EBA) increases and against low funding growth.

Occupancy levels and staff costs may also be impacted by the trade up of new

homes in FY2018. Regis opened four new homes, Estia opened two new

homes and Japara opened a new home and extended two existing homes.

During the trade up of a new home, staffing levels are generally less efficient

than a fully operational home. They are also higher to reflect the level of

training and personnel required to ensure appropriate systems and processes

are in place to minimise potential clinical and governance risks. We expect staff

costs to remain steady or increase with the introduction of the new aged care

quality standards.

Source: Investor Presentations

63%65%

70%

67%66%

70%

58%

60%

62%

64%

66%

68%

70%

72%

REGIS ESTIA JAPARA

FY17 FY18

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Government revenue levels have remained steady for Japara and Regis which

reflects the indexation freeze and changes to scoring in the Complex Health

Care domain for ACFI. We expect to see an improvement as indexation freezes

relax. Estia’s modest subsidy increase reflects higher resident acuity which

drives higher subsidies and supplements.

The marginal government revenue increases for the listed providers will also

reflect the level of investment in new homes, refurbishing existing homes and

higher levels of supported residents. Providers are able to receive a higher

accommodation supplement for supported residents in new or significantly

refurbished homes.

Nearly 60% (35 facilities, net of Club Facilities) of Regis facilities qualify for the

higher significant refurbishment supplement. Estia and Japara are continuing to

increase the number of homes that are eligible. Estia now has 19 facilities

eligible, compared to only 12 in FY2017. Similarly, 21 of Japara’s homes are now

eligible, a marked increase from the 10 homes that were eligible in FY2017.

This ongoing investment is essential to improve revenue and to meet current

and future consumer expectations.

The ability to increase resident revenue has been limited by the court ruling on

asset replacement charges as well as the Department’s position on charging

additional services. We expect to receive additional guidance on additional

services which will be crucial as providers prepare for the next generation of

residents and a consumer directed care model.

3. RE VENUE

REVENUE PER OCCUPIED BED PER DAY

Source: Investor Presentations

$197 $198 $193 $197 $198 $199

$84 $85 $68 $70 $77 $77

$-

$50

$100

$150

$200

$250

$300

FY17 FY18 FY17 FY18 FY17 FY18

REGIS ESTIA JAPARA

REV

ENU

E

Government Income POBD Resident & Other Income POBD

Revenue per occupied bed per day (POBD) for all three providers has remained

steady since FY2017.

There are two main components of government funding. Firstly, there is the

basic care subsidy known as the Aged Care Funding Instrument (ACFI).

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4. RESIDENT PROFILE

One of the most significant trends that providers are experiencing is a change in

resident profile. As evident in the graph below, the three listed providers have

experienced an increase in the number of supported residents and

corresponding decline in non-supported residents. Whilst supported residents

attract an accommodation supplement, and thereby increase operating income,

this movement implicates the ability for providers to receive potentially higher

accommodation payments through either Refundable Accommodation Deposits

(RADs) or Daily Accommodation Payments (DAPs).

An analysis of non-supported resident payment preferences has indicated that

across the three providers and the wider industry there is a movement away from

RAD paying residents. At the industry level, this change is more pronounced, with

non-supported residents increasingly electing to pay a DAP. With the Department

estimating an investment requirement of $54 billion over the next 10 years, it will

be important to monitor this trend and its implication for sector funding.1 Refer

to Section 6 for further analysis.

RESIDENT PAYMENT PROFILE

Source: Investor Presentations

48% 46%56% 54% 55% 53%

43% 45%

43% 45% 41% 42%

9% 9%1% 1% 4% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY17 FY18 FY17 FY18 FY17 FY18

REGIS ESTIA JAPARA

NON-SUPPORTED SUPPORTED OTHER

1 ACFA Fifth report on the Funding and Financing of the Aged Care Sector July 2017

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Source: Investor Presentations and ACFA Sixth Report of Funding and Financing the Aged Care Sector, July 2018

*Note, FY2018 information not available.

Growth in the average incoming RADs have also begun to slow. Despite opening

four new facilities in FY2018, Regis’ average incoming RAD has only increased

by 3% since the prior year. Estia has experienced slightly higher growth of 5%

over the year, whilst Japara experienced a decline, with the average incoming

RAD decreasing to $323,900 from $351,700 in the second half of FY2017.

NON-SUPPORTED RESIDENT PAYMENT PREFERENCES FY17 AND FY18

68% 67%61% 59% 56% 55%

41% 38%

10% 9% 22% 21% 27% 26%

35% 40%

22% 24%17% 20% 17% 19% 24% 22%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY17 FY18 FY17 FY18 FY17 FY18 FY16 FY17

REGIS ESTIA JAPARA ACFA*

RAD DAP COMBINATION

AVERAGE INCOMING RAD, FY16 TO FY18

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

FY16 HY17 FY17 HY18 FY18

AV

ERA

GE

INC

OM

ING

RA

D

REGIS ESTIA JAPARA

Source: Investor Presentations

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5. SHARE PRICE TREND

Share prices for the listed aged care providers have remained relatively steady

throughout the year. Since the release of their FY2018 results, Japara and

Regis experienced a small decline and Estia share prices slightly increased.

SHARE PRICE TREND JANUARY 2018 TO SEPTEMBER 2018

Source: Yahoo Finance

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

AD

J. C

LOSI

NG

SH

AR

E P

RIC

E ($

)

REGIS ESTIA JAPARA

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6. SECTOR FINANCING

As outlined in Section 4, we are seeing a change in the mix of RAD, DAP and

Combination payments which is starting to show in the cash flows.

We have seen a dramatic increase in lump sum deposits from residents

following the Living Longer, Living Better (LLLB) reforms introduced in July

2014. A large proportion of the sector’s developments have been supported

by resident lump sum payments. At 30 June 2017 the Commonwealth reports

aggregate deposits of almost $25 billion (which is underwritten by the Federal

Government).

An incoming resident has the option of payment method, and more are

electing daily payments over lump sums. The ACFA 2018 report revealed a 19%

increase in the number of people electing to pay a DAP in metropolitan homes

in the 2017 financial year, which is a material shift away from RADs and

Combinations. The results of the listed entities suggest that this trend is

continuing (see below).

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1H FY16 2H FY16 1H FY17 2H FY17 1H FY18 2H FY18

NET

RA

D I

NFL

OW

PER

BED

($

)

WEIGHTED AVERAGE NET RAD INFLOW FOR ALL THREE PROVIDERS

Source: Calculated based on net RAD cash flow and operational beds per Investor Presentations and Financial Reports.

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In the future, we expect there will be a continued slowing of net RAD inflows per

bed when compared to recent years. There are several reasons for this:

1. Reform Normalisation – The 2014 reforms enabled providers to charge RADs for

a consumer group that were not eligible to pay lump sums under the old system. As

new residents were admitted post 1 July 2014, un-bonded places were filled with

RAD paying residents and this resulted in the dramatic inflow of deposit funds into

the sector. However, with an average length of stay of less than 3 years, most new

residents will now be replacing residents that entered under the new regime.

2. Payment Preferences – Section 4 demonstrates that non-supported resident

payment preferences have been shifting from RADs to DAPs and Combination

payments. Supported resident levels have also increased in recent years. We are

seeing more departing RAD paying residents are being replaced by new residents

that are paying DAPs, Combinations or Government daily subsidies (supported

residents).

3. Competition – The LLLB reforms initially had the desired impact of stimulating

investment in residential aged care. Access to RAD capital helped to facilitate new

developments and refurbishments across the country. Consumers have enjoyed

better access to higher quality accommodation and expectations have risen. In

some areas, this new supply has resulted in greater competition and many

providers are having to adjust pricing to maintain occupancy.

4. Property Prices – RAD values are closely linked to house prices, which have shown

signs of slowing after record growth across the Victoria and New South Wales

markets. Lower residential sales values and slower turnover will have a flow on

affect for RADs and payment elections.

RADs have traditionally been preferred as a low cost means of financing new

developments, however, many of our clients now prefer DAP payments. The DAP

represents a return of just under 6% of what would have been paid on the RAD (and

increases in line with interest rates). Because the RAD is normally well above the

cost of construction per bed of the home, this usually represents a strong return on

investment.

However, a sector-wide change in funding arrangements needs to be carefully

managed, particularly given that some providers in Australia are heavily RAD

dependent and maintain limited liquidity based on historic RAD/Bond cash flow

requirements.

Over the past six months, we have been working with the major banks to address

this potential longer-term shift in sector funding. Most financiers are accustomed

to the repayment of a large portion of development finance as residents enter the

new facility. We believe that there may be an even greater opportunity for banks to

contribute to future investment through longer term core debt.

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7. CONCLUSION

It has been a pretty rough winter all round for the listed providers and there

are still some difficult times ahead.

However, the Commonwealth has achieved its Budget saving targets through

ACFI cuts and the indexation freeze. We expect that funding levels should

reach closer alignment to cost escalation in the 2019/20 financial year. With

some targeted lobbying ahead of the election, the industry should be able to

encourage greater Government support for the aged care industry.

The Government’s 2016 aged care funding cuts have also triggered a marked

slowdown in capital investment across the country. At the same time, the

supply of home care alternatives remains tightly constrained. These influences

will strengthen demand for residential aged care in the medium term and this

will advantage the listed operators with their newly refurbished and expanded

portfolios.

They must still navigate changing resident payment patterns in readiness for

acquisition opportunities and continued developments. We believe the

greatest consolidation opportunities will present over the next 12 months.

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ABOUT “IN A NUTSHELL” To help busy executives in a rapidly changing aged care world, Ansell Strategic provides summaries and high level commentary on new developments in the industry. Detailed reports are provided on our website at www.ansellstrategic.com.au.

FOR FURTHER INFORMATION, PLEASE CONTACT:

CAM ANSELL Managing Director Telephone: (08) 9468 7520 Email: cam@ansellstrategic.com.au

AMBER CARTWRIGHT Manager - Advisory Telephone: (08) 9468 7527 Email: amber@ansellstrategic.com.au

ANSELLSTRATEGIC.COM.AU

Please note the information provided in this report does not constitute or purport to be formal financial advice.