week 9 - retirement homes

Question 1

what are retirement villages

Answer 1

Live independently
Designed for people aged 55 years or older
Entirely self funded
Deferred Management Fee (DMF) is paid and in most cases kept by the Retirement village

Question 2

what are aged care facilities

Answer 2

Require daily assistance with personal care
Average age of entry is typically 80 years or older
Entry is restricted by need and must be assessed to enter.
Residential Accommodation Deposit (RAD) is paid and fully refunded/Daily equivalent of a Daily Accommodation Payment (DAP). DAP = RAD x MPIR / 365.

Question 3

Aged Care Funding Instrument (ACFI)

Answer 3

ACFI Funding assesses the relativecareneeds of residents and is the mechanism for allocating the Government subsidy toaged care providers for deliveringcareto residents.
3 key domains:
ADL: Activities of Daily Living
BEH: Behavioural
CHC: Complex Health Care

Question 4

explain revenue components

Answer 4

ACFI (Aged Care Funding Instrument)
Resident Daily Fee
Supported Resident Accommodation Supplement (Significant Refurbishment) post 12 April 2012
Additional Services/Extra Services
Respite Supplements
DAP (Daily Accommodation Payment), RAD/DAP Combo RAD x MPIR (currently 5.54%) adjusted quarterly
Ancillary eg. Viability Supplements, Pensioner Supplements etc

Question 5

explain valuation methodology

Answer 5

Trading history, generally 3 years.
Payment statements, resident profile, bonds / RAD, occupancy, profit and loss statements, income and expenses and benchmarks.
Make adjustments & addbacks e.g. interest, lease payments
Forecast Net Operating Profit (EBITDAR) - industry benchmarks
Capitalise EBITDAR

Question 6

future trends of aged care **

Answer 6

Greater combination independent living & home care
Expansion of home care
Unbundling residential care costs / subsidies to target those most in need
Continuation of dual gate-keeping?
Planning and allocation retained
Expansion ‘consumer-centred’ care (with user pays) - RUCS
Improved responsiveness in aged care/ market segmentation

Question 7

explain deffered manangement fees

Answer 7

Variety of DMF Structures
Percentage Entry/Exit

Plus Capital Gain Share
Traditional DMF structured as 2.5% – 3% per annum to a maximum of 10 years on exit
Some DMF 2.5% - 3% per annum based on entry price plus 50% of capital gain
Recently shortening of accrual– deals with later entry age eg. 6% per annum over 5 years / extended term maximum

Question 8

deffered management fees example

DMF Structure – 3% p.a. on resale price, capped at 30% in year 10. Zero capital gain to operator
Ingoing Price: $350,000
Resale Price in year 10: $520,000
Capital Gain: ($520,000 - $350,000) $170,000

Answer 8

DMF Calculation:

30% of $520,000 (resale price) = $156,000

Question 9

dmf example 2 - entry + capital gain

DMF Structure – 3.0% p.a. on entry price, capped at 30% in year 10. 50% capital gain to operator
Ingoing Price: $350,000
Resale Price in year 10: $520,000
Capital Gain: ($520,000 - $350,000) $170,000

Answer 9

DMF Calculation:
30% of $350,000 (entry price) = $105,000

Plus 50% of $170,000 (capital gain) = $85,000
Total DMF & CG = $190,000

Question 10

retirement vilage - valuation components

Answer 10

Costs % & $
Growth assumptions
Discount Rate
Entry Age, standard deviation of entry age
Sales lag (time between vacant possession and resale)
Major/minor refurbishment and timing

Individual dwelling values
Selling rates for developing villages
Rollover selling costs & refurbishment allowances
Age profiles & life expectancies (ABS State Life Tables)
Early Vacation allowances
Staging

Question 11

current issues in retirement villages

Answer 11

Continuum of Care
Support of debt providers – liquidity
Rating / Stamp Duty inconsistently applied
Competition from expanding MHE sector (Risks DMF? Real growth?)
Reputational damage to the sector from negative press around DMF contracts
New entrants to the sector – operational capacity
Non bank lenders - risks

Question 12

future trends of retirement villages

Answer 12

Co- location of residential aged care plus home care
Care offering in Retirement Village e.g. Tall Trees, Sunrise Supported Living and Freedom Aged Care
Importance of brand
Discerning market – segmentation
Affordable models – Manufactured Home Estates (also known as Land Lease Community)
Planning provisions and the establishment of Retirement Housing Zones
Ombudsman’s in retirement housing disputes
Deferred Management Fees on a pro rata basis
Operator requirement to provide exit fee estimation

Question 13

factors affecting value of health aged care

Answer 13

When valuing consider:
Building location, design and quality
Co-located; near hospital infrastructure
Adequacy of alternate living spaces & back of house (need to outsource)?
Mix of single rooms, twins, triples & quads
Need to drop beds for privacy and space (often 3 from 4)
Mix of private ensuites, shared ensuites and common areas ablutions
Obsolescence

(also financial indicators)
When valuing consider:
Financial Indicators
Sustainability of RAD’s
Average agreed prices for RAD / DAP of $393,000 (31st March 2018)
Average maximum RAD / DAP was $411,000/$64.97 (3rd April 2018), compared with $355,000 / $65.06 (29 July 2014) RPA per resident
Often long periods at CPI between market reviews
Inadequate stock has seen rental reductions from passing
Passing rents = market?

When valuing consider:
Other Indicators
Facility viability for low bed numbers
BCA 3 & BCA 9a or BCA 9c
Highest and Best Use