ACCOMMODATION BONDS: FUTURE DIRECTIONS

DAVID ARMSTRONGChief Executive - Amity Group Pty Ltd & DCA Aged Healthcare Holdings Pty LtdDirector – Guardian Healthcare Group

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Presentation Overview

1. Overview of DCA Aged Care

2. Australian Industry Overview – Key Features &

Trends

3. Improved Capital Funding – Accommodation

Bonds

4. Where to from here?

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DCA Group Businesses

Aged CareDiagnostic Imaging

Australia

Amity Group

DCA Group Limited

UK

Lodestone

New Zealand

Guardian Healthcare

Australia

I-MED Network

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DCA Aged Care Group

Total of 83 centres with around 6,000 beds under operation in Australia

and New Zealand

350+ independent living units (mostly Guardian)

12,500 “back to base” medical alarms customers (all Guardian)

Total

Number of Facilities 45 38 83

Beds

Low care / Rest Home 592 17% 1,056 42% 1,648

Standard High Care / Hospital 2,138 61% 1,463 58% 3,601

Extra Service High Care 782 22% 782

Totals 3,512 100% 2,519 100% 6,031

Australia New Zealand

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Amity Group (Aust)

Operate 3,500 beds at 45 centres, with a further 3 centres

and a number of extensions under developmentPost completion of new developments 4,000 beds under

operation

High Low ES

ES

Total GrandStat

eCare

Care

HC

LC Operational

Provisional

Total

Total 48

2,138

572

782

20

3,512

455

3,967NSW 2

41,185

194

206

0 1,585

389

1,974QLD 3 12

349

100

0 272

0 272VI

C15

210

476

20

1,210

66

1,271ACT 1 13

40 0 0 13

40 13

4SA

5 208

119

0 0 327

0 327

488

Bond potential on 40% of beds

Closer to 50% on completion of developments

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Current Developments

New 44 bed Extra Service centre in Willoughby, Sydney

Conversion and upgrade of a former general medical /

surgical hospital to a 108 bed aged care centre in

Waratah, Newcastle;

New 112 bed aged care centre on the Sutherland

Hospital site, as Preferred Proponent under a “build own

and operate” Joint Venture with SESIAHS;

Low care extensions and upgrades to 6 existing high

care centres total 275 beds – average extension size 45

beds

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Amity Grand at Mosman

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Amity at Dural

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Amity at Dural

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Amity at Tumut

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Amity at Tumut

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Amity at Tumut

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2. Australian Industry Overview –

Key Features & Trends

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Three Residential Care Asset Classes

High care (Hospital) – operating margins under pressure – indexation of funding not meeting staff cost increases, & poor capital funding as no accommodation bonds can be charged to new high care residents ($11 - $17 pbd).

Low care (Rest home) – poor funding of care services (RCS), can charge accommodation bonds, but demand is for High care (home care usage increasing) – increasing occupancy softness. LC expected to become all HC in future – just meets required ROI now with “ageing in place” of residents’

Extra Service – complicated regulation / funding, but facilitates viable provision of high care by charging accommodation bonds and Extra Service daily care fees

New developments virtually all attract accommodation bonds – portfolio moving from 40% to 50% of beds with bond potential

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Planning Ratios

Aged care planning ratios are determined by Commonwealth Government and are used to guide the allocation of new aged care places to a region

Current ratios per 1,000 people in a planning region aged 70 or over are: 40 High Care places 48 Low Care places 20 Community Aged Care places

Government has allocated around 56,000 aged care places over the past 6 years including around 36,350 residential places

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Allocated vs Operational Beds: Jun 05 +

Residential Community    Total Residential Community    Total

As at 30 June 2004 174,657 30,043 204,700 156,056 29,779 185,835

As at 30 June 2005 183,395 33,540 216,935 161,165 32,588 193,753

Allocated But Not Operational 22,230 952 23,182 14% 3% 12%

Future Targeted Allocations

ACAR2005 13,030ACAR2006 8,800ACAR2007 6,045

Over 3 years 27,875 14%

51,057 26%

Total Allocated Places Total Operational Places

Total "In The Pipeline"

% of current operational places

Industry occupancy has fallen from around 96.5% in FY 02 to 95.3% in FY 05, expected to be below 95% for FY 06

Net increase in operational residential care beds of around 5,000 per year

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Other Industry Statistics

Around 1,600 providers with 3,000 homes / 160,000 beds

Average provider has less than 2 homes

61% not for profit, 31% for profit, 8% Government

At June 2003 only 12% of homes were 80 beds +

Funding indexation at around 2% pa + 1.75% pa “top up”

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Significant variation in profitability of providers

Average EBITDA per bed per year ($)

State Top 10% quartile

1st

quartile

2nd

quartile

3rd

quartile

4th

quartile

NSW(1) 13,261 8,962 3,614 1,030 -5,639

QLD 11,289 7,811 3,921 999 -4,021

SA(2) 10,384 7,845 3,735 1,110 -7,169

TAS(3) 20,074 15,835 3,556 1,163 -3,633

VIC 15,184 10,733 3,626 980 -6,521

WA 10,501 7,126 3,604 1,154 -3,457

Australia 13,350 9,116 3,654 1,044 -5,771Notes: (1) Includes ACT(2) Includes NT (3) The small number of observations calls for cautious interpretation

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Standard HC Funding Overview

• Standard high care (hospital) funding around $180 per day• Resident pays between $30 and $100 per day – income

and asset testing• Accommodation component is maximum of $17 per day

($6,205 per year)• Top 10% EBITDA - $13,350 pa (per bed)• Cost to develop new $120,000 - $200,000+ (per bed)• Metro – land $30k, build $140k+, fitout $15k, licence $??

(per bed)• $13,350 / $200,000 = 6.6% pa EBITDA return• No new high care for pensioners being built in metro areas

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3. Improved Capital Funding -

Accommodation Bonds

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Accommodation Bonds

A payment that a person entering a low care or an extra service aged care home may be asked to pay – either as:

a lump-sum payment - refundable within a specified timeframe after departure (usually 14 days)

providers allowed to deduct a ‘retention’ amount (currently $273.50 per month) for up to 5 years from the date of entry;

a periodic payment, which is made up of 2 components – the retention amount and the interest that the service provider would normally earn on the lump sum; or

a combination of lump sum and periodic payments.

Accommodation bonds must be used by the provider to: improve building standards and the quality and range of aged care services provided or to retire debt.

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Supporting increased investment

Per Bed Day

Per Bed Per Yr

% Revenue Per Bed Day

Per Bed Per Yr

$ $ $

Basic Resident Fee Contribution 34.76 12,434 20% 34.76 12,434 Accommodation Fees 16.56 5,924 10% 8.99 3,216 RetentionCare (RCS) Subsidies 113.99 40,774 66% 113.99 40,774

Other subsidies eg: Payroll Tax 6.60 2,361 4% 6.60 2,361 TOTAL INCOME 171.91 61,492 100% 164.34 58,785

Staff 115.00 41,136 67% 115.00 41,136

Non Staff Costs 20.00 7,154 12% 20.00 7,154 TOTAL EXPENDITURE 135.00 48,290 79% 135.00 48,290

EBITDA 36.91 13,203 21% 29.34 10,495

Investment per bed 110,000 200,000 Less 90% of lump sum bond - 112,500 125,000 Net capital Employed 110,000 87,500

EBITDA ROI 12.0% 12.0%

Lump Sum Bond AlternativeStandard Funding

Increased quality ….greater resident choice

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Prudential Requirements

Various protections are in place for residents who have paid lump sum accommodation bonds. Aged care providers who receive lump sum bonds must: Guarantee in writing to repay the bond balance within the statutory time periods

(usually 14 days after departure); Pay interest on the bond balance for the period from the date of the resident’s

departure to the date the bond is actually repaid; Provide information to bond-paying residents within four months after the end of

the financial year about the: number of accommodation bond balances that were not refunded within the statutory

timeframes during that financial year; provider’s performance against the prudential requirements; and Resident’s entry in the ‘bond register’ which all bond taking services must keep up to

date.

If an aged care provider becomes bankrupt or insolvent, the Australian Government will repay the accommodation bond balance to the resident (including any accrued interest) and has the right to recover the cost by pursuing the defaulting provider and/or levying all aged care providers who hold bonds.

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Market Acceptance Of Bonds

An estimated 73.6% of aged care homes in Australia held accommodation bonds at 30 June 2005. Note that this includes some ‘high care’ homes that accept accommodation bonds when residents ‘roll over’ from low care to high care.

The average new accommodation bond agreed with a new resident in 2004-2005 was $127,618 compared with $112,613 in the prior year

Market based, but rule of thumb is around 40% of average house price in area

Percentage of bond payments by way of lump sum has increased from 89.2% in 2001-02 to 91.8% in 2004-05

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4. Where to from here?

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• Provide increased choice for elderly requiring high / hospital care

• Those with financial capacity should be provided range of options – esp accommodation and non care (hotel / hospitality) services

• Home care has service delivery efficiency limitations for those requiring 24 hour assistance

• Government should plan for ageing population – provision ratios & targeting limited taxpayer dollars to providing aged care safety net for those in need

• Keep contract / fee structure simple – reducing average length of stay (increased daily fee vs accomm bond vs licence to occupy)

• Reducing Government regulation with increasing private pay – providers meeting market & community expectations

Where to from here?