Financial Performance of the Sector
Tier 1 and 2 financial performance trends
The NSW Tier 1 and 2 Sector is diverse in terms of both its primary business type and financial size. The total asset value outlined in this section of the report captures the entire NSW Tier 1 and 2 Sector; it includes 34 CHPs and uses their most current and previous submitted financial performance reports.
The NSW Tier 1 and 2 Sector is assessed as financially viable with no significant compliance concerns identified.
Combined profit as measured by Operating EBITDA[2] (Earnings Before Interest, Tax, Depreciation and Amortization) was $171.03 million and Operating Income was $ 2.43 billion, translating Operating EBITDA Margin of 7.04%.
Overall the amount of interest bearing debt for the NSW Tier 1 and 2 Sector remains small compared to value of total assets of CHPs considered. Total aggregate debt valued at approximately $495 million with total assets valued at approximately $9.9 billion translating to a Sector gearing ratio of approximately 4.96%.
The majority of Performance Outcome 7: Financial Viability recommendations made by the Registrar to Tier 1 and 2 CHPs since 2014 have been administrative in nature and did not reflect provider performance.
One of the financial income pressures for the Tier 1 and 2 Sector is the future of NRAS incentives. The Registrar can clearly identify (through compliance assessment data submitted by CHPs) that the downward trend of NRAS incentives is gradual from forecast year 2020 to 2026, then the incentive drops considerably.
For those CHPs who receive NRAS incentives, whilst the incentive drops dramatically post cessation, they are forecasting an increase in operating EBITDA in terms of dollar value. Operating EBITDA margin remains stable at 11-12% for most of the forecast years and interest cover ratio is above 3 times in all except one forecast year.
This means that CHPs are anticipating replacing the loss of NRAS funding by diversifying operational activities and generating other income streams. Net operating cash-flows are also expected to increase across the 10-year forecast.
Based on the data and this analysis, the downward trend of NRAS incentive does not seem to threaten the viability of the community housing Sector. However the cessation of NRAS is likely to impact affordable housing stock with some rent adjustments to market rates expected.
As part of the planned enhancements to reporting systems the Registrar will consider in greater detail the financial assumptions provided by CHPs. Additional guidance may be provided to ensure future financial trends are accurately reported.
Financial Performance of the Sector
The following two graphs (Total Assets and Housing Assets) break down balance sheet values for the latest and previous financial periods by Tier. Overall both graphs show a comparable increase across financial periods but there is a significant difference between Tiers.
In Total Assets the proportion between Tiers is roughly equal however for Tier 2 CHPs the majority of their balance sheet assets are related to non-community housing operations such as aged care.
This is shown in the Housing Assets graph with over 95% of housing assets as measured by dollar value managed by Tier 1 CHPs.
When viewed in light of total assets (beyond just housing and assets) in the graph above, Tier 2 CHPs appear much larger due to the skewing effect of several very large Aged Care CHPs in the Tier 2 Sector. This is expected to change in the coming periods due to a significant proportion of SAHF properties expected to be constructed by Tier 2 CHPs.
Debt versus Gearing
These graphs compare by Tier the overall dollar value of interest bearing debt to the level of gearing. The line at the top of the graphs represent the NRSCH benchmark for gearing. As shown below while debt levels are increasing, the gearing ratio, particularly for Tier 2 CHPs remain modest. This indicates the Tier 2 Sector has the capacity to absorb additional levels of debt sustainably.
These measures will be a focus for the Registrar in coming periods as debt levels are expected to increase, in part due to government programs such as SAHF and NHFIC.
Income versus Profitability
These graphs compare by Tier the overall dollar value of operating income to profitability as measured by the Operating EBITDA Margin. The line at the top of the graphs represent the NRSCH benchmark for profitability which is set at 8% and 3% for Tiers 1 and 2 respectively.
These graphs show that while operating income has increased, profitability has declined. However these movements are not a compliance concern. Profitability is comfortably above benchmark and the declines for both Tiers are due to one off factors which may not affect subsequent periods.
The Registrar will closely monitor these metrics in the coming periods to see how the sectors profitability is affected by government programs in particular the impact of the SHMT.