‘Profitable’ aged care operators being targeted by private equity and investment funds (again), seeking Opco/Propco deals

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In every recession, investors reach out to property, searching for stability.

While it was already under way, the COVID-19 recession has accelerated the interest in the quality property portfolios held by ‘profitable’ aged care operators that can be guaranteed to pay a rent at a level regarded as a reasonable investment return.

The interest is in establishing Opco/Propco deals where the investors purchase the landholdings, leaving the operators to run their businesses and pay rent at an acceptable investor return rate.

Regis, Japara and Estia are each under the microscope, according to informed media speculation. And to help us understand why, HomeCo has released the background to its purchase of just one aged care home, Aurrum Aged Care’s Erina home (NSW Central Coast).

My colleague Lauren Broomham reviewed the figures last week in The Daily RESOURCE.

Check out the chart above. In simple terms HomeCo, an Australian listed property investment fund, purchased the property for $32.59 million and the operator Aurrum will pay $2,200,000 a year rent – a return/yield of 6.75%pa.

In today’s market this is a strong investment grade result.

As Lauren pointed out, if you take a closer look the deal is even better.

First up, HomeCo only provided $12.59 million in cash – the rest was in HomeCo securities.

Then look at the cost per bed. Aurrum spent $16.5 million on the 71-bed extension of the Erina home in 2017.

If you divide the cost of the extension by the number of beds, it cost $232,000 to build each new bed.

But when you take the $32.59 million sale price of the completed 250-bed facility, HomeCo has paid just $130,000 per bed.

And note that Aurrum is responsible for the maintenance and capital expenditure of the asset that HomeCo owns.

HomeCo has achieved all the benefit of a secure asset in a key location with growing demand (the ageing population) without any of the risk, such as declining RAD pool.

The first mover in Opco/Propco aged care funding was Justin Laboo’s Catalyst, backed by $300 million from Sunsuper. One of his early clients was QLD’s PresCare that has got into trouble with its diverse business activities, resulting in them recently handing back one just completed aged care home. We understand Laboo has not had trouble finding a replacement operator.

Earlier this year, Australian Unity and Infinite Care partnered for an Opco/Propco deal on six aged care homes in Queensland with the former to invest in the property while the latter is the approved provider.

To give you an insight into the new enthusiasm for aged care, and ageing assets, see this article reviewing HomeCo’s strategy.

Note: the founders of HomeCo are also the original investors in Aurrum Aged Care, reported here.