Regis Healthcare Ltd (REG) – Force for good

Regis Healthcare engages in the provision of residential aged care services in Australia. It provides aged care services, including ageing-in-place, respite care, specialist dementia care, and palliative care services through operation of aged care homes located in Victoria, Queensland, NSW, South Australia, Tasmania, Northern Territory and Western Australia.

The federal government has released its long-awaited response to the Aged Care Taskforce, targeting long-term sustainability and increased investment into the sector. Key reforms include: 1) Refundable accommodation deposit (RAD) retention of 2% pa; 2) increasing the maximum room price to $750,000 (from $550,000 since FY14); 3) higher everyday living funding; and, 4) biannual daily accommodation payment (DAP) indexation. The changes will only apply to new residents.

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REG emerges from this generational regulatory overhaul with:1) an improved business model that should provide less regulatory risk and better returns on capital; 2) a renewed growth strategy, with RADs to fund development); and, 3) a balance sheet supporting significant M&A optionality.

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We note that higher room and RAD prices will drive a multiplier effect

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The Regis incoming RAD price has increased at a compound annual growth rate (CAGR) of just 2% between FY18–24, stifled by weaker occupancy. This has been running well below median house price growth, with a36% increase in the ‘soft-cap’ to $750,000 (the first rise in a decade)providing plenty of headroom to push room prices higher in a tighter supply environment.

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We have now baked in RAD retention and a higher hotelling supplement, but see multiple drivers of upside risk versus OML forecasts, including: 1) accelerated capital deployment into greenfields projects or M&A);2) higher accommodation supplements; and, 3) higher RAD prices.

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