Take two vulnerable groups of people: toddlers and the aged. Throw in large amounts of government funding, a handful of extreme capitalists with pre-GFC form, and sharemarket investors looking for constant profit growth. Stir.
It’s a recipe for disaster. Two recent raisings — the $450 million float of nursing home operator Japara and a $100 million capital raising by the G8 childcare group, still underway — are another sign we have failed to learn the lessons of the financial crisis, and that irrational exuberance may be returning to the sharemarket.
Soft business coverage is one dead giveaway. Japara Healthcare, the first pure aged care company on the ASX, which made a stunning debut last Thursday, got a dream run in the media, with underwriter Macquarie apparently “inundated with calls” ahead of the float at $2 a share. After Japara shares jumped 35% on day one, to close at $2.70, The Sydney Morning Herald quoted analysts from (who else but) Macquarie! The Japara float was so successful, it is expected to lead to copy-cats, with private equity-backed Allity lining up for some easy money.
It is easy to be bullish on aged care. We all know about the ageing population. The government forecasts we need another 74,000 nursing home places (on top of the existing 186,000) by 2022. That will cost $25 billion, so private investment is necessary. The previous Labor government’s “Living Longer, Living Better” reform package, enacted last year and coming into force from July 1, will abolish the distinction between high-care and low-care beds in nursing homes and make it possible to charge all residents an accommodation bonds.
Accommodation bonds are the key to investing in nursing homes, and provide just the kind of complexity and opacity that financial engineers like Macquarie love to exploit. The policy framework was set up in 1997 under then-prime minister John Howard with close involvement from the private sector, particularly the late Doug Moran. It is a fairly one-sided arrangement: the aged care provider gets the interest generated by the bond, for working capital or any other purpose (sometimes including cross-subsidising parts of the operator’s business, outside aged care) and can deduct a regulated amount each year (currently almost $4000 annually).
It is effectively free money; providers can charge whatever bond they think the market will bear, relative to local house prices given most residents sell their homes to raise the bond. Bonds were not expected to exceed $100,000 originally, but are averaging about $275,000. There are fears they may go higher.
Japara’s prospectus explains that bonds of existing nursing home residents are generally paid out — on average, after a 29-month stay that ends either in death or relocation to acute hospital care — with bond money deposited by new residents, which have generally risen in the meantime in line with property prices. At the risk of being alarmist, paying out earlier entrants with money deposited by later investors is one of the defining characteristics of a pyramid scheme.
Indeed, although the bonds are backed by a government guarantee — which has been called on to cover $25 million in bond repayments to date, out of a national pool north of $12 billion — Japara’s own prospectus canvasses the risk that “a major issue at a facility … could require Japara to repay a large number of bonds that cannot be replaced immediately”.
From July, residents will be able to choose between paying an accommodation bond or an equivalent daily rate, or any combination of the two. When the reforms were introduced, the industry warned many residents would choose either not to pay a bond, or to pay a much smaller bond. This could cause a one-off outflow of capital, threatening the balance sheet of smaller operators, as old high bonds were repaid and replaced with smaller bonds. Japara chief Andrew Sudholz told the Senate inquiry into aged care last May this was a “massive, serious risk for the industry”.
Where Sudholz sounded bearish a year ago, however, Japara’s April prospectus was upbeat, declaring it was poised to benefit and sees “significant latent cash flow potential” as it will be able to charge bonds for its high-care beds. Japara is forecasting cash inflows from bonds will rise from $9 million in 2012-13 to $25 million in 2013-14 and triple to $77 million the year after. Japara expects its accommodation bonds to rise from $236,000 on average to $264,000 this year alone.
Where do rising bonds leave the aged? It is hard to predict how the reforms will unfold. Charmaine Crowe, senior adviser for the Combined Pensioners and Superannuants Association, believes many residents will still choose to pay higher accommodation bonds to keep their assets down so they can hang onto their pension, soon subject to tighter means testing. Crowe says there is an inherent conflict of interest between for-profit companies, with obligations to shareholders, and care for the aged.
“We believe the current regulation around care quality is failing and doesn’t ensure resident health and welfare is upheld.”
“Making a profit is always going to trump quality of care,” she told Crikey. “We believe the current regulation around care quality is failing and doesn’t ensure resident health and welfare is upheld.” She also warns against providing excessive public funding to provision of nursing home places, when a better and cheaper alternative would be to fund home care, given the overwhelming preference of the elderly is to stay in their own homes. “Nobody wants to move into a nursing home unless they absolutely have to,” she said.
Certainly, quality can not afford to decline. Lateline‘s groundbreaking “aged care crisis” investigation by Margot O’Neill last year exposed woefully inadequate standards of care across the industry. Japara is no exception. Operating arm Aged Care Services Australia Group was criticised by Victoria’s coroner after an 89-year-old dementia sufferer at its Central Park nursing home in Melbourne died in 2007, four days after she was assaulted by another patient, who also had dementia and was prone to violence.
In 2008 the federal government ordered checks of all 32 nursing homes operated by ACSAG after finding malnourished residents — two weighed less than 25 kilograms — and dangerous understaffing at its Kiralee nursing home in Ballarat. Then-federal ageing minister Justine Elliott said practices at Kiralee were “just unacceptable”.
Japara appears to have cleaned up its act since then, although it made the news again after a carer accidentally gave 10 times the required dose of morphine to a patient, who subsequently died, at the Tamar Park nursing home near Launceston in 2010, which was later closed.
Japara was also subject to serious allegations in the Victorian Supreme Court in 2010 by former chief executive Arnan Rouse, including that Japara’s property trust held on to $8 million in residents’ accommodation bonds. The case was only settled in 2012 when the rest of Japara’s shareholders bought out Rouse’s 20% stake in the company for $21.5 million, with money borrowed from the company and declared a dividend in last week’s float.
Before the float, Japara’s two major shareholders were Sudholz and Julius Colman, who each held 31.4% of Japara Holdings, which was sold into the float at $233 million. They have retained stakes of 6% and 4%, worth $39 million and $34 million at yesterday’s price of $2.57 and have shared in tens of millions of dollars in cash. Sudholz also got a tasty float bonus of $1.5 million, paid.
Sudholz has a long background in the property industry, including as a partner of collapsed auditors Arthur Andersen, merged locally with Ernst & Young, where in 2004 he helped promote an unregistered managed investment scheme, Business Australia Capital Finance, run by lender Ian Lazar, subject of Four Corners investigations that year and — astoundingly — again this month. In 2004 Sudholz was also embroiled in litigation over a joint venture to develop a 98-unit retirement village in Melbourne’s Kew with Primelife, founded by entrepreneur and former bankrupt Ted Sent.
Colman, now described as a professional poker player and philanthropist, is a lawyer who pioneered the unlisted property syndicate in Australia, founding the MCS business, which paid high commissions to financial planners who flogged hundreds of millions of dollars’ worth of property to investors. Colman sold MCS to shopping centre owner Centro in 2003 for a stunning $194 million, and thousands of syndicate investors subsequently got caught up in the collapse of Centro when the GFC struck in late 2007.
Years later, the former MCS property syndicates are still being wound up — often at heavy losses.
*Monday: part two of Crikey‘s series on developers cashing in — this time in childcare