A crisis facing aged care: Can government support revitalise bed supply ahead of the baby boomers?
The baby boomer generation has transformed society in countless ways — they’re now poised to revolutionise the residential aged care sector.
The first of the Baby Boomers are now approaching 80 years old and are beginning to enter residential aged care. The scale of the Baby Boomer generation will place immense pressure on the residential aged care sector to provide adequate care and services. This demographic shift, combined with recent reforms aimed at boosting the sector’s profitability, will benefit quality aged care operators like Regis Healthcare (ASX: REG).
The Supply Shortage of Aged Care Beds:
Australia currently has ~225k residential aged care beds, but the sector has recently been struggling with profitability due to limited funding increases and rising operational costs. As a result, net new bed supply growth has stalled at <1% p.a. This limited growth in the number of beds is a major concern ahead of the expected surge in demand for residential aged care services from Baby Boomers.
Growing Demand for Residential Aged Care:
The average age of admission to residential aged care in Australia is 83 for men and 85 for women. Projections indicate that Australians aged over 85+ will soar from 565k in 2023 to 958k by 2034. We estimate that around 350,000 Australians will require an aged care bed by 2034, implying the sector will need to add at least an additional 130,000 net new beds or approximately 13,000 p.a. over the next 10 years to match this demand. This required bed build rate is well above the average of ~1.5k net new beds added p.a. in the last 3 years.
Recent Aged Care Reforms to Boost Sector Profitability:
On 12th September 2024, the Australian government introduced a new Aged Care Act, which received bipartisan support. This legislation addresses critical issues raised by both the Royal Commission and Aged Care Taskforce. The key changes will improve the profitability of the sector as aged care residents begin to pay more for their care from 1 July 2025.
Our analysis suggests that these changes will increase funding for aged care operators by between $15-$30 per resident per day (depending on room price assumptions). These funding changes will be grandfathered-in and therefore earnings benefits for aged care operators should begin to be fully realised by the end of FY28.
Earnings Implications for REG and Will This New Funding Drive Bed Supply Growth:
REG operates approximately 2.6 million occupied bed days per annum. A $1 per resident per day increase in funding – without associated costs – translates to an additional $2.6 million in EBITDA p.a. With an expected rise of $15-$30/day in funding, REG’s EBITDA could grow by as much as $40 million to $80 million by FY28 (assuming no occupancy uplift or changes to the accommodation supplement which is under review). This would increase REG’s EBITDA per bed p.a. from around $14,500 in FY24 to between $21,000 to $27,000 per bed in FY28.
However, the ultimate question remains: Will this announced increase in funding be enough to spur the required net new bed supply growth? Historical trends suggest it may not be enough. In FY17, REG's EBITDA per bed p.a. was around $41,000, yet sector net bed supply growth was still only approximately 3% p.a. To achieve the roughly 5% p.a. net bed supply growth that is needed and given construction costs have increased materially since FY17 (around $500,000 to build a new bed), we see the possibility that further increases in funding may still be required to meet the demand from Baby Boomers.
Conclusion:
The recent bipartisan support of the aged care reforms underscores a recognition from both sides of the government of the challenges that have faced the aged care sector in the past few years, and the need forincreased funding to stimulate bed supply growth. Although REG share price has r'sallied post the announced reforms, we continue to see upside for REG as the supportive regulatory environment and long-term demand trends bolster earnings.
Never miss an update
Enjoy this wire? Hit the ‘like’ button to let us know.
Stay up to date with my current content by
following me below and you’ll be notified every time I post a wire
David has over 5 years’ financial markets experience. His most recent role was as a sell-side investment analyst at MA Financial, covering a diverse range of industrial stocks. Prior to that, David worked at Schroders within the Australian equities team.
David is an Investment Analyst within the Blackwattle Large Cap Quality and Blackwattle Long-Short 130/30 Quality Funds.
David holds a Bachelor of Commerce with majors in Finance and Accounting.
........
The information in this article has been prepared by Blackwattle Investment Partners Pty Limited (ABN 24 663 839 094) (BIP). BIP is a corporate authorised representative of Blackwattle Licensing Pty Limited (ACN 665 711 839 AFSL 547 617) (corporate authorised representative no. 001304362).
This article contains general information only and is not intended to promote or recommend any particular product or services offered by BIP. It has been prepared without taking into account the objectives, financial situation or needs of any investor. Before making an investment decision, investors should read the relevant offer document and seek professional advice to determine whether the investment is suitable for them.
This article is current as at the date indicated, and may be superseded by subsequent market events or for other reasons. No representation or warranty is provided as to the reliability or accuracy of the information contained in this article. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. All investments contain risk and may lose value.
Neither BIP nor its related bodies corporates guarantee the performance of any financial product or the return of an investor’s capital. Rates of return cannot be guaranteed and any forecasts, estimates or projections as to future returns should not be relied on, as they are based on assumptions which may or may not ultimately be correct. Actual returns could differ significantly from any forecasts, estimates or projections provided. Past performance is not a reliable indicator of future performance.
Please contact BIP if you would like to know more about the products and services we offer.
Never miss an update
Get the latest insights from me in your inbox when they’re published.
5 topics
2 stocks mentioned
David has over 5 years’ financial markets experience. His most recent role was as a sell-side investment analyst at MA Financial, covering a diverse range of industrial stocks. Prior to that, David worked at Schroders within the Australian...
Expertise
David has over 5 years’ financial markets experience. His most recent role was as a sell-side investment analyst at MA Financial, covering a diverse range of industrial stocks. Prior to that, David worked at Schroders within the Australian...
Expertise
Comments
Comments
Sign In or Join Free to comment
most popular
Equities
How to find an ASX "super stock" early (and an example of one)
HD Capital Partners