Sinclair Currie, Principal and Co-Portfolio Manager
Regis Healthcare is an Australian operator of residential aged care facilities. The company has a successful track record of developing and operating residential aged care facilities and is one of the largest in a fragmented market. Novaport has built a position in Regis in the aftermath of the cuts to aged care funding announced in 2016 budget. We see opportunities for Regis to grow driven by underlying demand for its services as well as expansion via acquisition and organic growth. We discuss the key attributes and risks below.
Established track record
Governments and consumers expect residential aged care providers to deliver higher standards at each and every facility. This demands investment in facilities and operational capability which some operators have not been willing or capable to commit. In response there has been increased consolidation of providers which we believe will continue. This presents an opportunity for providers such as Regis (which has invested in standards and procedural based operational capability), to leverage its’ investment across a broader portfolio. The evidence of Regis’ operational capability lies in its capacity to maintain high occupancy and healthy returns per place relative to its competitors.
As outlined in our industry view, residential aged care bears some resemblance to an essential service. Few people want to have to use it, however consumers expect it to be available if they need it. Excessive cuts to government funding will ultimately incur a political cost as aging populations place increased demands on existing infrastructure.
Healthy pipeline of opportunities
Regis has been successful in applying for additional aged care licences which provides the company with a significant organic expansion opportunity. This can arise either by adding capacity at existing facilities or new builds. The company may also grow via acquisition. Resident bonds are an important part of the funding for Regis’ expansionary capex plans and represent an attractive source of funds.
- Government funding and regulation are an ongoing source of risk for the sector. The government seems willing to listen to the sector. However with persistent federal budget deficits pressures are likely to remain. Without sufficient funding the sector will fail to deliver the quantum or quality of services the community expects.
- Operational risks include the regulatory and reputational damage from failing to meet quality standards are high. We rely on the organisation to establish and enforce robust and consistent operational procedures to manage these risks.
- Fluctuations in occupancy and the value and composition of accommodation bonds/daily payments impact the profitability of the business. While these should balance out over time, investors rely on the company maintaining prudent and disciplined financial control to weather any cyclicality.