RSM Australia

RSM aged care community insights - June 2016

Profit from employing a right sizing strategy

While strong financial performance is associated with high occupancy providers who are experiencing sustained high vacancies can benefit financially by 'right sizing' their facility. This is particularly suited to older style facilities where there has been a permanent shift in the supply and demand balance.

Since the announcement of the 2015 Aged Care Approval Round (ACAR) results RSM has successfully assisted a number of providers sell excess operational places. In doing this we have also assisted providers, who were unsuccessful in the ACAR to implement their expansion plans. Based on these transactions vendors and purchasers can anticipate prices in the range of $55,000 - $70,000 per place. While these transactions were in NSW and VIC, we are aware of significant demand for places in all states.

Vendors perspective

In the case of the vendor the places had become excess because of changes in demand and through undertaking a significant refurbishment that converted multiple bed rooms to single ensuite rooms. In practical terms the sale of places that had become excess provided the funds to undertake a significant refurbishment, turning an asset that was returning 0% into one that earns upwards of 17%. This right sizing of the facility results in higher operating income from the higher accommodation supplement and increases to RAD and DAP from self-supported residents. The result is a more sustainable facility.

The 2016 budget and the ministers subsequent communication as to forward funding, represent a serious threat to the sustainability and viability of many operators. Exploring the impact of a right sizing strategy as an option to enhance operating income and to minimise capital invested in facilities should be a priority to any provider experiencing sustained low occupancy.

Purchasers perspective

Unfortunately 60% of providers who applied for places in the recent ACAR were disappointed with the outcome. With this level of unmet demand the most likely outcome is an even higher level of demand in the 2016 ACAR. This suggests an even lower chance of success in the 2016 ACAR. Given the apparent preference towards larger operators smaller providers who are looking to expand would do well to adopt a duel strategy embracing, ACAR applications and on market purchase of places.

 

2011 (June)

2013 (December)

2014 (June)

2015 (September)

ACAR places offered / allocated

7,933

7,775

11,196

10,940

ACAR places sought

12,295

10,975

19,169

38,859

Places sought relative to places offered

1.6*

1.4*

1.7*

3.6

Some providers express concern that the value of places will fall should the deptartment move from managing supply through controlling allocated places to adopting a demand management policy, as will be the situation in home care from February 2017. While there is merit in this argument with respect to a vendor wishing to sell excess places it is not the case for providers who acquire places.

The current regulatory framework allows the total value of a facility to be allocated to its component assets. If places are deregulated then the value currently ascribed to the 'statutory licence' will be reallocated to the other assets, including goodwill. This means that if you pay for regulated places now then in a deregulated market this value will merely shift to other assets of a provider, including goodwill.

Purchasers and vendors

If you are a provider experiencing high vacancy or a provider whose expansion plans are being frustrated by the ACAR, engaging in the secondary market for approved places is an appropriate strategy notwithstanding the uncertainty around the long term future of the ACAR. If you would like a representative from RSM to talk with you about rightsizing your facility or acquiring additional places contact us here. The red tape reduction amendments mean the process of selling places is far simpler and that save for exceptional circumstances there is little risk that a sale will not be approved by the department.

An ACAR support service that really works

As noted above we believe that the 2016 ACAR will be even more competitive than the 2015 ACAR.

We assisted a number of providers with their applications in the 2015 ACAR. While not all applications were successful we had two significant achievements:

  1. our success rate was 60% compared to an industry average of 39%
  2. the only successful new facility applicant in the highly competitive Northern Sydney region was a client of ours

 

These results clearly demonstrate the value of utilising our services if you are considering applying for places in the 2016 ACAR.

While the timing of the 2016 ACAR is unknown and in anticipation of an even more competitive round in 2016, we are looking to engage with clients far earlier in the process to ensure these applications are of the highest standard. Unfortunately this will limit the number of clients we will be able to assist this year.

As in the 2015 round, we will be offering clients a choice of a fixed price and success based engagements.

To find out more about our ACAR application support service or to reserve your place click here.