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Oceania Health targets wider margins with high-end aged care strategy

Friday 26th January 2018

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Oceania Healthcare is going upscale with its aged-care offering, targeting suites that attract a variety of fees over and above the government funding accompanying a traditional care bed. 

The Auckland-based company has 51 sites around the country with 3,893 care beds, care suites and units, and 1,782 more in the development pipeline, of which 59 percent are either under construction or consented. 

Currently, 66 percent of the company's portfolio is in care beds, with 7 percent in care suites and 27 percent in independent units. Its portfolio differs markedly from other listed operators, with Metlifecare at 7 percent care beds and 82 percent independent units; Summerset with 20 percent care beds and 68 percent independent units; and Ryman with 35 percent care beds and 45 percent independent units.

While Oceania is looking to shift those proportions - in future, it would like to have 43 percent care beds, 18 percent care suites, and 39 percent independent units - chief executive Earl Gasparich said the company is still very much focused on aged care. 

"Our strategy is to rebuild our product with the care suite model which has higher economic benefits, in terms of recycling of capital and increasing earnings per bed because of deferred management fees," he said. "We're decommissioning single-level, traditional government care beds, and rebuilding five stories on the beachfront at Brown's Bay - a very premium offering, and one with really high demand."

Oceania makes more money from care suites - which generally have an ensuite, lounge area, and kitchenette, along with hospital-level care - than it does from beds alone. Residents pay a lump sum upfront and a net management fee, on top of the daily care fee which can be partly or fully paid by the local DHB.

"We want to be able to make it more valuable, and to do so you can't use the traditional government funding model," he said. "Nobody, other than a few charities, are building traditionally funded government beds."

In December and so far this year, retirement stocks - which had made steady gains over the past few years on the strength of house prices and the ageing population - have dropped back, which market watchers attribute to data showing that house price gains have slowed. Gasparich says the company is not concerned by house price movements, as Oceania's earnings are far more resilient to that factor than other operators.

"If I was an investor in one of the other stocks, with a far lower weighting towards care, yes I'd be concerned," he said. "Your earnings are far more driven by the resale pricing of whatever comes up in a certain year. We've got 73 percent of our portfolio in aged care. If the local house price falls, that's not going to stop a person who requires care moving into a care facility."

Gasparich said that generally, pricing of a retirement village unit will be about 80 percent of the local residential house price, but in some of the very high-value areas in Auckland, it can be much lower, around 50-to-60 percent of what residents sold their house for.

"Generally speaking there's a bit of a buffer before that will impact on your retirement village prices, that's why all the operators are reporting that they haven't seen material impacts on prices, and certainly we haven't," he said. 

While Oceania has said its 18.7 percent gearing, on debt of $118.1 million, giving it the flexibility to accelerate development or buy new brownfield or greenfield sites, the chief executive said the company has enough land to keep it going - " we don't need to acquire anything for another five or six years."

The company almost doubled first-half profit to $20.5 million when reporting its interim result yesterday, including a $34.1 million gain in the fair value of its investment property portfolio, valued at about $1 billion as at Dec. 31.

Oceania's shares fell 5.6 percent to $1.02 yesterday following the earnings announcement. Gasparich said he thought that drop was volume related with investors crystalising profits on the stock, which listed at 79 cents in May last year. 


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