Financing the Future of Aged Care 25 October 2004

1
Richard GatesHead - Healthcare Services,ANZ
Institutional Banking
Financing the Futureof Aged Care25 October 2004
2
Aged Care in Context

• Australian Healthcare market (other than aged
  care).largely consolidated
• For Profit Hospitals 3 significant players
  Affinity, Ramsay, Healthscope
• Not For Profit Hospitals stable 45 of private
  beds
• Diagnostic 4 players DCA, Sonic, MIA,
  Gribbles
• Mainline pharmacy 3 players Sigma,
  Mayne/Fauldings, API

3
Significant MA Activity in 2003/04

• For Profit Hospitals
• Diagnostic
• Mainline pharmacy

• Affinity/Mayne 813m Ramsay/Benchmark 130m
• DCA/MIA 700m,
• Gribbles/Healthscope 270m
• API/Priceline 112m,
• Mayne/Fauldings on market 300m

4
Aged Care Growth/Funding

• Aged Care Asset Class - Highly Attractive (albeit
  some caveats)
• Why Attractive?
• 9.2b capital spend next 10 years gt Asset
  pool 4 annual growth in physical stock
  (140,000 200,000 beds)
• Government underwritten funding
• Socially responsible lending
• Business lending market never more important to
  banks

5
Asset Class Why Attractive? cont

• Receiving Institutional Interest
• Consolidation
• The DCA Story
• Hastings/Craigcare
• Ramsay Healthcare intentions (Moran assets and
  broader)
• Certain NFPs partially withdrawing
• The Salvation Army
• Vision Victoria
• PropCo/Op Co Structures (eg Moran/Omega,
  Primelife, ALH, MSIG)
• Emerging private equity appetite (undisclosed
  deal)

6
For Profit Aged Care Vs Pharmacy Services
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The Funding Dilemma
Next 10 year RAC investment load identified by
Hogan 9.2b
CAVEAT HYPOTHETICAL SCENARIO ONLY
Estimated Roll-up costs
Optimising Existing Bonds
NFPs own resources
NFPs gearing existing beds
Debt Funding new beds (1.5b) and roll-up (1.0b)
Bonds on new beds
Funding Gap
Required spend
Funding source
NB Makes no allowance for 2.0b industry spend
estimate over Hogan estimate
8
Bank Funding Required 5.5b
Sources - traditional bank lending- capital
markets (mortgage backed securities)
NFPs gearing existing beds
Debt Funding new beds (1.5b) and roll-up (1.0b)
Bonds on new beds (bridged)
2.0
Caveats - debt market appetite selective- no
open cheque book
Required spend
Funding source
9
But..

• Funding the future
• Potential Gap approximately 3b
• How to fund the Gap?
• Equity new players to industry existing
  operators (limited)
• Financial engineering (For example, PropCo/OpCo
  structures)
• Bonds on high care?
• NB new industry players require 20 Return on
  Equity

10
Funding the Future cont

• Accommodation Bonds to issue 3.5b requirement
• Preparedness of not for profit sector to optimise
  at normal market levels? Appetite is increasing
• Double jeopardy
• Bond liability in 10 years circa 6.5b
• (3b existing 3.5b new)
• Need for increased industry regulation/guarantee
  fund?

11
Constraints on Bank Lending in Aged Care

• Amount of debt determined by leverage level
• Debt to Value Ratio
• Recognises accommodation bonds as priority
  creditor
• Typically 55 to 70 including bonds
• Determinants of leverage
• Management
• Business plan
• Accreditation and sanctions
• Operating systems
• Buildings/facilities
• Adequacy of RoI for new high care

12
Dilemma for New High Care

• Hypothetical Example
• Facility Value 10.0m
• Bond nil
• Debt 6.0m
• Equity 4.0m
• NPAT 0.4m
• After Tax RoI 10

• Assumptions top decile operator
• No. of beds 100
• Amount invested 10.0m
• LVR 60
• EBITDA/bed 12k
• EBITDA 1.2mDepn/Capex 0.2mInterest 0.4mNP
  BT 0.6mTax 0.2mNPAT 0.4m

Decreases to 8 at 120k per bed cost
The irony for investors in new high care beds
higher equity required but sub-market return
13
PropCo / OpCo Model

• Sale of freehold to a third party investor
• Lease back for 10 years with multiple options
• Investors
• Property Trusts
• Superannuation
• Infrastructure Funds
• Vendor retains right to operate
  facility/control over bed licences

14
PropCo / OpCo Model cont

• Benefits to operator
• 20 of additional capital released for new
  investment
• Investor carries property ownership
  responsibilities funding load
• Operator concentrates exclusively on optimising
  business operations
• Issues for operator
• Reduced flexibility in dealing with the
  facility/landlord consent
• Long term fixed commitments rental capex
• Capital growth transfers to the property owner

15
PropCo / OpCo Model - Example
Assume 100 bed operator. Sale of Freehold for
9m. Operator retains leasehold
Going Concern Value 1.4m _at_ 12 cap. rate
12mFreehold Value Rent 800,000 _at_ 9
9.0mLeasehold value plant 600,000 _at_ 20
3.0m
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Summary/Conclusions

• An attractive asset class - 11b estimated 10
  year spend
• Banks have considerable appetite for debt, but
  will be selective no open cheque book
• Significant 10 year funding gap gt 3b
• Industry challenge - how to meet the gap
• Significant equity required, but investment in
  new high care struggles to reach RoI targets
• Management/optimisation of Accommodation Bond
  opportunity critical

17
ANZ Response to Aged Care

• Consolidation/Specialisation
• Priority market segment
• 1 national portfolio leader
• Bill MitchelmoreNational Manager Aged Care
  Financial Services(03) 9273 00320411 125 442
• Portfolio coverage Single facility operators to
  Institutional operators
• Leads 20 Relationship aged care experts Australia
  wide