As we commence 2022, the outlook for the aged care sector remains as clouded as it was at the beginning of 2021.
2020 and 2021 saw operators in the sector impacted by a multitude of issues, such as the Royal Commission and the Government’s budget response in 2021; COVID-19 and its effects on occupancy, costs, resources and resident deaths, as well as sustained funding and regulatory pressure. By the end of 2021, operators as a group had sustained:
- Declining occupancy.
- Rising cost pressure.
- Resource constraints and shortages.
- Declining financial and operational performance.
- Increased funding needs.
- Increased uncertainty over regulatory reforms arising from the Royal Commission.
Providers faced ongoing uncertainty against a backdrop of continuing consolidation and a dramatic uptick in facility sales including exits and forced exits from the sector. Home care and home support services have likewise been significantly impacted.
It was a tough period, and just as a possible return to greater normality appeared to be approaching at the end of 2021 with the post lockdown period commencing, Omicron arrived. Omicron has again affected the Aged Care Sector significantly, with cost and resource issues, and of course the return of numerous deaths across facilities despite the vaccination programs. There continues to be uncertainty about subsequent COVID variants post Omicron, and the likely impacts on services, staff and those in care.
In some senses then, the outlook for 2022 is unchanged – sustained pressure and uncertainty. So what does this look like?
For a start, trading conditions will be challenging. In this regard:
- Costs will continue to stay high and increase due to compliance requirements and rapid cost spikes in managing COVID outbreaks.
- Resourcing pressure will continue and is presently climbing following Omicron. This will impact wage costs.
- Occupancy, which has declined since the COVID outbreak in 2020, is likely to slide again in the short term with Omicron affecting resident numbers.
- Cash flow for all of the above factors will be under further pressure together with funding demands likely to rise as the trend away from RAD funding continues.
- The current uncertainty is likely to be sustained through 2022.
The impact on operators will be realised as:
- Declining trading margins.
- Declining profitability – if you were losing money in 2021, then 2022 may potentially be as bad or worse.
- Reduced funding availability – there is expected to be a continuation of the move away from the provisions of Refundable Accommodation Deposit (RADs) by new residents and their families. Consequently, operators will likely need to progressively replace existing RAD funding with alternative sources. This may be challenging for smaller operators in particular, where there has been a dependency on RADs. The banking sector is somewhat tight and unlikely to be enthused about providing working capital funding to replace RADs, particularly for businesses which are experiencing declining performance.
- Reduced enterprise value arising from the write-off of bed licenses, as their value declines in preparation for their removal.
The outcome will not be all bad, but there is definitely a hurdle for many operators in the year ahead. The challenges remain for operators and their financiers.
As a sector, the outlook will see:
- Performance pressure & funding pressure – which will make or break some.
- Continuation of the consolidation trend – a trend which might favour financiers and government.
- More exits from the sector, dominated by the small, the marginal and the distressed. Last year Colliers identified a material increase in “walkouts” or facility handovers of distressed operators. They identified a significant increase in 2020 to 22 walkouts which increased again in 2021 to c30 walkouts.
Whilst not a rosy picture, the uncertainty which exists clouds any ability to forecast with confidence. Having said that for many operators this uncertainty and pressure will create opportunities - opportunities to acquire, to grow and to diversify.
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