Equity raisings could rejuvenate aged-care outfits

The listed aged-care space is under the spotlight not only for potential merger and acquisition activity, but equity raisings as well.

Market analysts have identified Japara Healthcare and Regis Healthcare as the candidates that most need to tap the market.

Regis has declined to comment on whether an equity raising is on the cards, whereas sources close to Japara maintain that the company is not looking to raise equity but instead reduce its debt by selling and leasing back some aged-care facilities.

Japara, with a market value of $127m, had debt of $201m at April.

Regis had net debt of $281.5m at December and has a current market value of $433m. Its cash on balance sheet was just over $26m six months ago.

Should a raising come in the days ahead, Regis will likely use close adviser Macquarie Capital, adding to the list of the equity capital markets deals that have proved lucrative for the Australian investment bank this year as it assists companies to secure a cash buffer for protection against COVID-19.

The Qantas deal last week involving a $1.4bn placement is believed to have netted $22m in transaction fees for Macquarie Capital and JPMorgan, with the banks entitled to 1.55 per cent of the total raised.

The problem for aged-care providers, according to some, is that while they offer an essential service, costs are increasing, with wage inflation running at about 3.5 per cent versus revenue increases in some cases of about 1 per cent. High costs surrounding the deployment of temporary staff are also a major factor.

The COVID-19 pandemic is also said to be driving occupancy lower, with people removing loved ones from facilities over concerns about the pandemic.

This leads to the payout of bonds to the residents.

A potentially weaker housing market could also have an impact on the industry.

Of the listed aged-care providers, Estia is said to have the best balance sheet, with net bank debt of $96.6m at December.

On the face of it, listed aged-care providers look cheap because they are trading below replacement cost.

While plenty of private equity firms and strategic groups have been circling the sector, the thinking is that investors won’t be eager to inject money into the providers until the findings of the royal commission into the industry are known around November.

One of the listed groups being watched as a potential buyer of aged-care properties is Home Consortium, run by David Di Pilla.

The listed company is not currently looking at opportunities but has earlier signalled the potential establishment of a healthcare and wellness REIT, which has some wondering whether it might buy a company like Regis.

One possibility is Di Pilla seeding a new healthcare care property trust with some of his own privately owned aged-care assets in his Aurrum Aged Care.

Di Pilla tried to sell those assets about two years ago, but they were retained when he was unable to secure the desired price.

Also, interestingly, it is understood that either Home Consortium or other interests backed by Di Pilla purchased a small stake in Japara Healthcare recently before later divesting the shares, offering further weight to the theory that he could be a player in any industry consolidation.