Beware Government funding in the retirement village sector
By Murray Brown, Senior Portfolio Manager, New Zealand
06 October, 2016
We like the New Zealand retirement village sector, having been a shareholder in Ryman Healthcare for over a decade, and in Summerset since it listed in 2011. Both have been outstanding performers for our New Zealand funds over an extended period. There is much to like about their business models, in particular their ‘continuum of care’ strategy of caring for their residents as they age within their villages. The level of Government funding in Ryman and Summerset’s business models are modest, and are largely restricted to the small aged care part of the village.
Contrast this to the Australian listed retirement village sector, where Australian Federal Government funding is the key driver of their business models. The listed operators Estia Health, Japara Healthcare and Regis Healthcare operate solely in the aged care end of the market, typically buy rather than build their villages and rely heavily on Government funding to operate their villages. Their funding is by way of Aged Care Funding Instruments (ACFI), with the Federal Government providing accommodation bond deposits and daily care funding for the elderly in retirement villages.
The trouble with relying on Government funding is that healthcare budgets are always under pressure, particularly as the population ages. If budgets get cut, earnings and share prices of the aged care operators can come under pressure. This is exactly what we’ve seen over the last two months.
The Federal Government indicated it will tighten ACFI funding in August, which has seen analysts’ reduce their earnings forecasts for the three Australian listed aged care operators by ~20%, and the share prices weaken by up to 35%. Regis Healthcare builds many of its own villages and has been the least affected by the funding costs of the listed Australian operators.
Should we be concerned that Ryman Healthcare is looking to expand into the Melbourne market? No, we believe that its superior model and development margins will ensure that government funding will remain an immaterial part of its business model as it expands into that new marketplace.