Regis Healthcare Limited (REG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Regis Healthcare FY '21 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Dr. Linda Mellors, Managing Director and CEO. Please go ahead.

Thank you, operator. Welcome to the Regis Healthcare results presentation for the year ended 30th of June 2021. I'd like to begin by acknowledging the Boon Wurrung and Wurundjeri peoples of the Kulin Nation, traditional custodians of the land on which we meet today, and pay my respects to their elders, past, present and emerging. I extend that respect to any Aboriginal or Torres Strait Islander people joining us on the call. With me today is Rick Rostolis, our Chief Financial Officer. I'll ask Rick to take you through the detailed financial and operational information for the year later in the presentation. Our presentation today is in 6 parts. I will start with some overarching comments in relation to the current operating environment and sector reform, following the completion of the Royal Commission and the Australian government's response. I will then speak to the impacts and ongoing requirements arising from the COVID-19 pandemic. We will provide the details of our financial and operational performance for the year. I will then go through some other matters, the company's strategy and outlook before taking questions. Our last few presentations now have outlined the difficult time being experienced in the aged care sector. In fact, it's difficult to imagine more challenging operating conditions in the past 12 months. Regis has responded to the many and varied challenges with consistent commitment and focus. We've entered a period of major reform now that the Royal Commission is complete, and we have the Australian government's response to the recommendations from the final report. Regis strongly supports the need for reform of the sector and across all of the domains highlighted by the Royal Commission and various other reports beforehand. To that end, Regis is a founding member of the aged care reform network and is actively supporting the work of the Aged Care Workforce Industry Council. Responding to COVID-19 has required close management, including operational changes, supporting our residents, clients and employees, and coordinating the vaccination of our workforce. At the same time, our executive team has balanced the external matters with our own ambitions for Regis. I'm very pleased with how the executive team has come together and the balanced consideration of our residents, client, family, workforce and business requirements. Our executive team has the breadth and depth of expertise and experience to manage the increasing complexity of the aged care system in terms of the higher acuity and expectations of residents and clients and the clinical and corporate governance models for a maturing sector. The executive has worked hard over the past year to recruit additional skills into our management team to deliver the planned program of work. Regis has assessed the available information on the time table for reform, and this has been factored into our 3-year strategic plan, our annual business planning and our assessment of enterprise risks. Our data intelligence continues to support strong growth for the sector with an aging demographic, the reform outcomes, including additional requirements and funding, a substantial increase in the workforce and a likely reduction in the number of providers as providers themselves and regulatory requirements continue to raise the bar. Regis supported the Royal Commission's work through 10 submissions on topics, including workforce, future system design, funding requirements and built form of aged care homes. We also hosted visits to 2 of our homes, supported surveys by the Royal Commission, and IP does an expert witness at the finance and funding hearing in September. The final report with 148 recommendations was released in February 2021. And Regis supports the priority areas identified as workforce, funding, governance, quality and safety and system reform. However, we were disappointed by the lack of agreement between the 2 commissioners in the final report that led to divergent views expressed through the report and in the commissioners at times, making different recommendations to address the same problem. It's noteworthy that in March 2021, the Australian government responded to an urgent recommendation by the commissioners than an immediate funding uplift of $10 per resident per day be provided pending the recommended funding increases through the reform program. The Australian government announced its substantive response to the final recommendations in the May budget. The response is centered around a 5-year 5 pillar reform plan, costing $17.7 billion. The key features of the plan are an additional 80,000 home care packages to clear the wait list of older people waiting extended times for care. An additional $10 per resident per day until the AN-ACC pricing model comes into effect, a new requirement for an average of 200 minutes per resident per day, including 40 minutes with a registered nurse, increased funding for the regulator, a new model for the assessment of older people needing care, a retention bonus for registered nurses staying with a provider for more than 12 months, improvements to access for older people in regional, rural and remote areas and a new Aged Care Act. Notably, at $17.7 billion, the government's response is the largest funding package since the Living Longer Living Better reform in 2013. There is still much detail to be worked through, but the narrative of system reform is encouraging. Importantly, there is now line of sight to increase funding for the sector in both home care and residential aged care. For residential aged care, there will be a much-needed activity-based funding model that will include a price for quality to be set by an expanded independent hospitals pricing authority. Good and efficient providers should benefit from this model. The transparency that will come with independent pricing recommendations will be important to avoid the sector falling into another state of sustained underfunding. The intended market deregulation will address the concerns Regis has expressed about the protected market and limitation from consumer choice. The removal of bed licenses will increase competition around quality of care, service and accommodation and importantly, removes the existing restrictions that providers build-in areas where they can bid for or acquire licenses. Regis is highly supportive of the need for more transparency and accountability for providers, government and the regulator. Being a publicly listed company, Regis is already compliant with transparent reporting and continuous disclosure obligations. As one of the largest providers in Australia, Regis is well placed against many of the intended reforms, including corporate governance, clinical governance, prudential controls, food and nutrition standards, registered nurses on-site and career pathways across all roles. There remain multiple areas of concern arising from the communicated reform timetable, and there is a need for further consultation to understand the implications of elements of the reform agenda. Review of the Aged Care Act and the other key reforms are scheduled later than expected. The flow of the substantial additional funding for providers to increase the workforce is some years away. In the meantime, there is a current and increasing risk concerning workforce supply and relatively lower rates of pay than like sectors. I'll note here that there is a work value case before the Fed Work Commission that is not contemplated in the announced funding package. There's a significant risk of nonvalue-adding regulatory burden and Regis joins with other providers in calling for regulation that is fit for purpose, effective and efficient. Unfortunately, the long-term future of refundable accommodation deposits, or RADs, remains unclear. Regis continues to contend that there is no viable alternatives, and government cannot and should not be paying for accommodation for those who have the means to pay themselves. Regis also contends that RAD/DAP the most efficient model to encourage development and redevelopment in the sector. Finally, provider and investor return on investment won't be clear for some time due to the unnamed price for quality to be used in the AN-ACC funding model, the future of RADs and long-term planning for capital funding and the cost of compliance with increasing regulation. I've spoken in previous updates about the substantial improvements Regis made in preparing for and responding to the COVID pandemic. Regis continues to take all necessary steps to protect our residents, clients and employees. Our pandemic planning committee continues to lead our response and our outbreak management plan is regularly reviewed and refined. The company continues to hold stocks of personal protective equipment in hubs across the country to ensure our workforce can access this essential safety equipment as required. There have been no further outbreaks in any Regis Haynesville site since those reported at the half year announcement. The company remains grateful for the ongoing care and diligence of our workforce and the ongoing understanding of our residents, clients and families who continue to navigate changes to lockdowns and visiting access across the country. The vaccination of aged care residents and workers continues. While the initial intension of government was to vaccinate all residents and workers at each site, the government plan shifted to vaccinate residents only with workers able to access excess doses if available. Regis was subsequently successful in a government tender process to vaccinate our own workforce, along with any residents who had not yet been vaccinated and wish to be. We are working with a third-party provider to provide 2 clinics at each of our homes so that all employees and residents can access 2 doses of the vials of vaccine 3 weeks apart. All residents and employees have access to other sources of vaccination, including through GPs, pharmacies and large hub clinics. Residents have the option of vaccination and most of our residents have wanted to take this up. Currently, 86% of our residents have had 1 dose and 78% 2 doses of the vaccine. The Australian government has mandated that all residential aged care workers have a first dose of vaccine by the 17th of September. Regis is well on track to meet this deadline with 86% of our workforce having had 1 dose and 58% having had both doses. It's evident that the community will be living with COVID-19 threats and requirements for an extended period, and the operational changes Regis has made are now effectively business as usual. Along with the human impacts on our home communities, the pandemic has also impacted our operations, revenues and expenses. At a high level, Regis' expenses associated with COVID-19 outbreaks in single site working requirements were offset by government funding and grants and Rick will take you through the details of this shortly. In this section of our presentation, I will provide you with an overview of our financial performance, and Rick will then take you through the details. Revenue from services was $701.4 million, up 3.5% on the prior corresponding period. The company delivered full year earnings before interest, tax, depreciation and amortization of $137.8 million and net profit after tax of $19.9 million. This result is well below what we would expect to deliver in a properly-funded environment, but it is a pleasing result in the current operating context. You will note the restraint on CapEx as foreshadowed in the FY '20 full year and FY '21 half year announcements. Highlights of our results include the increased occupancy compared with FY '20, even with the lower occupancy in Victoria due to the COVID-19 second wave. Net RAD cash flow of $37.7 million, which is a strong result across the entire portfolio of homes and in the current operating context. Net debt now sits at $142.4 million, reflecting a reduction of nearly 40% compared to this time last year. Our debt refinancing was completed in February, giving the company headroom to take advantage of market opportunities. And a final dividend of $0.0463 per ordinary share taking the full year dividends to $0.0663 per ordinary share or 100% of the NPAT. I will now hand over to Rick to discuss the financial and operational performance of the business in greater detail.

Thanks, Linda, and good morning, everyone. Just turning to Slide 9. FY '21 was a significant year for Regis, navigating the COVID-19 pandemic, facing ongoing government funding shortfalls and absorbing the Royal Commission final report including the Australian government response. Notwithstanding the many challenges faced by the business, management has remained focused on optimizing performance, including targeted plans to increase occupancy across all homes. As Linda has mentioned, revenue from services of $701.4 million was up 3.5% on the previous year, with the following items included in the increase. $7.7 million of COVID-19 government funding, comprising $6.8 million received in October 2020 and $900,000 of temporary ACFI uplift and $5.4 million of government funding received in the second half of the year as part of the immediate response to the Royal Commission final report. Within revenue from services, government revenue of almost $500 million was up 6.1% on FY '20 and made up 71% of revenue from services in total. The increase in government revenue also included the 1.6% COPE indexation. Resident revenue of $193.7 million was slightly down on the prior year, mainly reflecting reduced additional services fees due to COVID-19 restrictions. The increase in average occupancy to 88.9% from 88.2% in the prior year is across the entire residential aged care portfolio of 64 homes. The improved occupancy result was driven by a disciplined management approach, targeting specific homes with various strategies to drive an uplift, and I'll come back to occupancy in a moment. Other income included imputation of RADs of $64.4 million per AASB 16, government COVID grant of $4.2 million and the revaluation our investment properties of $11.7 million. Investment properties comprise our retirement villages and development sites. Please note that the net revaluation of investment properties was $9.2 million, as there was a one-off write-off of $2.5 million of capital work in progress during the second half. Staff expenses of $521.1 million accounted to 74.3% of revenue from services, up from 73.6% in the prior year. The increase in staff expenses was primarily due to the impact of COVID-19 with $7.7 million of staff-related costs incurred during the year of which $5.6 million was recorded in the first half. Enterprise agreement increases, which averaged circa 2.5% as opposed to indexation, which was only 1.6% and clearly inadequate to absorb the AI impacts, and regulatory penalties applied to our Netherlands home early in calendar 2021, which required additional one-off resources to be put in place. Staff expenses were also impacted by potential employee entitlement underpayments, which we announced to the market on the 9th of August. With the assistance of external advisers, we have commenced a review to determine the extent of underpayments looking back 6 years. While the review is ongoing and based on preliminary analysis, we have provided $35 million in the financial report. The FY '21 P&L impact of the $35 million was $7.1 million before tax, with FY '20 impacted by $6.4 million before tax. The remainder of the provision has been recorded against retained earnings brought forward from previous periods in accordance with AASB 108. EBITDA of $137.8 million is now reported post AASB 16, and it excludes the impact of one-off items that I will come back to on Page 11 of the slide deck. Depreciation and amortization was steady due to low capital expenditure during the year, while the impact of previous ramp-up homes was reflected in the FY '20 results. Finance costs of $74 million included $64.4 million of imputed interest under AASB 16. Excluding the impact of AASB 16, finance costs were down from $11.8 million to $9.6 million, in line with the significant reduction in the debt level. Reported net profit after tax of $19.9 million was well up on the prior year restated loss of $700,000. Please note that during the year, we changed the calculation of imputed interest income under AASB 16 leases, the company reviewed the MPIR calculation and determined that the MPIR rates applicable at the date of entry for each resident should have been used instead of the MPIR applicable to the current period. There was no impact on net profit after tax as a result of this change. So moving to Slide 10. Average available operational places across all homes increased to 7,144 year-on-year, mainly due to the acquisition made in March 2020, offset by the closure of one of our Melbourne-based homes in September 2020. As already mentioned, average occupancy was up from 88.2% in the prior year to 88.9%, with Victoria's occupancy impacted by COVID-19. Excluding Victoria, average occupancy for the full year was 90%. During the first half, the business averaged 88.3% occupancy, which included Victoria at 84.1% in the midst of Melbourne second wave. Post that difficult period, Victoria's second half average occupancy improved significantly to 87.4%. Overall, second half average occupancy increased to 89.6%, with the improvement in Victoria being a key driver. Spot occupancy across all residential aged care homes was 89.3% at 27 August, 2021, with ongoing lockdowns in New South Wales and Victoria, clearly having some impact. We have a continued focus on improving occupancy across all homes and the result reflects in part the positive effect of targeted management initiatives despite the impact of COVID-19. Government revenue per occupied bed day, excluding COVID-19, was up 5.6% on the prior year, supported by COPE indexation and also influenced by the increased acuity of residents. Aged care resident revenue per occupied bed day was down 1.4%. As mentioned, the decrease in part was due to reduced additional services revenue resulting from COVID-19 restrictions. Staff expenses, excluding COVID-19-related costs per occupied bed day increased primarily due to the impact of EAs. The number of RADs held remained stable with the value of RADs increasing by 2.7% to nearly $1.19 billion. The average RAD held increased to $432,000, up 2.4% on the prior year. Moving to Slide 11. We have presented on this slide the before tax impact of one-off and nonrecurring items during the year. Of note are the following: COVID-19 funding received during the period totaled $11.9 million made up of $6.8 million received in October 2020, $900,000 for July and August temporary ACFI uplift and $4.2 million of government grants taken to other income in the second half of the year. COVID-19 expenses of $11.8 million included staff expenses of $7.7 million, of which $5.6 million was incurred in the first half during the heart of the second wave in Melbourne, and $4.1 million of other costs, including PPE and infection prevention and control. COVID-19 is now effectively business as usual with ongoing expenses included in our cost profile. At 30 June 2021 and in line with previous years, an independent valuation of the company's investment properties was conducted. The results of the independent valuation was an uplift of $11.7 million. Separately, we reviewed the composition of the capital work in progress relating to investment properties and took a one-off write-off of $2.5 million against previously capitalized items. This has resulted in a net uplift in investment properties of $9.2 million. The impact of regulatory penalties on our Netherlands home led to an increase in one-off costs, including the appointment of an independent adviser. We have estimated lost occupancy and one-off costs of $2.2 million in relation to this matter. And I also note that the sanction expired on 23rd July 2021. Just moving to Slide 12. Significantly, in February this year, we completed the refinancing of a $515 million syndicated bank debt facility, which included the extension of $150 million of funding to March 2023 and $365 million to March 2024, net operating cash flow of $105 million, which was underpinned by EBITDA. And despite the negative impacts of COVID-19 related lockdowns, net RAD cash inflows were a positive $37.7 million, of which $33 million was generated in the second half of the year. Net RAD cash flows were positive in every state and territory during the year apart from Victoria. Importantly, Victoria returned positive net RAD cash flows in the second half. Management initiatives continue to produce positive RAD cash flows, notwithstanding that there are currently no ramp-up homes within the 64 home portfolio. Total net debt at 30 June 2021 of $142.4 million represents a 39.8% decrease in the previous year and a heavily reduced leverage ratio of 2x, down from 3x in FY '20. The leverage ratio is calculated using normalized EBITDA pre-AASB 16. We've undrawn funds in excess of $350 million under our bank facilities. The business has a number of options to grow both organically, through greenfield developments and inorganically through M&A, including home care, plus the flexibility to pivot growth plans as we better understand the funding environment going forward. As Linda has mentioned, the Board of Directors declared a final dividend of $0.0463 per share, 50% franked, payable on 30 September. This takes total dividends for the year to $0.0663 per share which is approximately 100% of reported net profit after tax. Moving to Slide 13. During the year, the company invested $18.7 million in capital expenditure mainly on maintenance and refurbishment of homes. This level of expenditure reflected the Board's decision to pause a number of planned development initiatives until the policy and funding environment is more certain and supportive of appropriate returns on investments in new developments. The residential aged care developments in the pipeline, including Camberwell, Toowong and now Belrose in New South Wales, activities such as preparing land for commencement, development approvals and design documentation are underway in readiness to commence construction once conditions are favorable to do so. Just on Slide 14. As you can see on this slide, the move away from RADs to RAD/DAP combos in line of industry trend continued during the year with 100% RAD payers now representing 57% of nonconcessional residents. Notwithstanding the above, the 30 June 2021 paid-up RAD balance is up on the previous year despite the continued challenges imposed by COVID-19 lockdowns. Unfortunately, the inequity of RADs versus DAPs was not addressed by the Royal Commission. As a result, given the current low MPIR attached to DAPs, it is likely that the industry trend preferencing DAPs will continue in FY '22. In the coming year, the business will still need to continue its operational disruptions, including the current New South Wales and Victorian lockdowns and margin compression from ongoing inadequate funding indexation. However, Regis will benefit from the increase in the basic daily fee supplement and hopefully, the easing of COVID-19 pressures. We expect greater clarity over the coming months from the Australian government regarding future care funding and the AN-ACC case mix funding model, and we remain confident that the company is very well placed going forward. And with that, I'll hand you back to Linda.

Thanks very much, Rick. There are 3 other measures that I'd like to turn to on the next slide. On the 21st of December 2020, Oneview Healthcare lodged a claim in the Supreme Court of Victoria against the company, seeking damages for alleged breach of the collaboration agreement between the 2 parties. Regis has engaged external legal counsel and intends to strongly defend the matter. Late last year, Regis received 2 bids from WHSP to acquire the company. Both proposals were rejected on the basis they materially undervalued Regis and the second proposed bid was formally withdrawn on the 20th of January 2021. Regis has received regulatory penalties in relation to 2 homes in Netherlands and Darwin. Both homes received a sanction in a notice to agree. In both cases, Regis has complied with all actions and requirements stipulated by the Aged Care Quality and Safety Commission. So moving on now for an update on our 3-year strategy. Our Board and executive commit significant time and energy to ensuring Regis has a clear and focused plan for the next 3 years. As an almost 30-year-old company dedicated to the care and service of older people, our purpose is clear and remains completely centered on providing personalized and respectable care that embraces the experience of aging. Our priorities and goals are grouped under 3 pillars: being the Regis culture of care, positive people in practice and ensuring our future. The Regis culture of care pillar uses our clinical governance framework as the base and particularly ensuring that the care and services we provide are personal, safe, effective and integrated. I've spoken previously about the need for the aged care workforce to be valued and supported. Regis will further our existing programs with key focus areas being teaching, training, research, safety, confidence and inclusion. The final pillar is ensuring our future, and this group of work includes our digital transformation program, our land and property assets, a diversified portfolio, accurate and efficient systems and processes, partnerships and environmental sustainability. So firstly, to reach this culture of care, and I particularly want to draw out a number of our existing programs where we already meet or exceed recommendations from the Royal Commission. Our board invests significant time in clinical governance, both at Board meetings and through our Board Committee for Clinical Governance and Care chaired by an independent director who is a medical practitioner. Along with health professionals on our Board and executives, Regis has registered nurses rostered at all homes 24/7 as well as expert clinical support teams and senior registered nurses available to support and advice around the clock. Our quality and safety processes and reports provide insights into our performance, and we have a range of guidelines around open disclosure with lower and transparency requirements. Our frontline teams use electronic clinical management software, ensuring all information about a residential client is available at the point of care. Our seasonal menus meet the nutrition requirements of older people with regular resident input as well as catering experts and our dietitian. Our teams work with each residents and clients to ensure that our care and lifestyle programs meet their personal needs and preferences. Regis also has a mature additional services program that is a key differentiator from our competitors. Every employee has been vaccinated against influenza. And moving to the right-hand column, we are well progressing our COVID vaccination program. You can read on the slide, the range of improvements underway to enhance consumer engagement, add to our clinical care and research partnerships and progress our research strategy. Our model of care reviews will ensure our programs are matched to changing consumer expectations and needs, especially as the increasing resident acuity is expected to continue. Work to reduce administration workload for frontline employees continues, allowing our workforce to spend more time providing care and companionship. In a key safety improvement, we plan to implement an electronic medication system that will interface with our existing clinical management system. We are also enhancing the number and timeliness of quality indicators that the Board and executive monitor. A residential clients' experience of Regis is at the point of care or service. To this end, Regis invests heavily in teaching, training and support programs for our workforce. You can see on the slide, the range of programs in place to provide key skills and updates to our employees, financial support for accredited study, in-house clinical and portfolio support teams and a confidential external employee assistance program. Regis places a high value on employee well-being and respect, and you can see the range of health, fairness, diversity and inclusion programs on the slide. Regis has comprehensive programs in place for performance review, development and talent mapping as well as ample evidence of career planning and progression across all roles. Our major focus is our workforce strategy and ensuring Regis is the employer of choice for our growing sector. So on to our final pillar, keeping ahead of the coming reforms as far as possible, will place the company in good stead from a competitive perspective. We're a key member of the aged care reform network and determined to play our part in systemic improvement across the industry. Our home care strategy sets out our plans to expand this part of our business and we anticipate sector consolidation here, too. Regis has long been a leader in design standards for residential aged care, and we have added environmentally-sustainable elements to all of our homes and offices. We are also increasing partnerships with local and sustainable suppliers to boost communities, support shared value creation and reduce our carbon footprint. We've significantly improved our cybersecurity capabilities and protections that respond to the increased risks to health and care providers. Importantly, our future is very much led by the continuous improvement and learning philosophies driven from the Board and executives through to our frontline teams. Our current work is focused on a range of necessary upgrades to various systems and infrastructure to address our business requirements, efficiency opportunities and data and predictive analytics. One area of particular focus is the upcoming activity-based funding program. We are well placed here with various executives holding extensive experience in activity-based funding models. With regard to our research and innovation partnerships, Regis is a desirable partner that can deliver rapid translation from research and innovation to practice. And our Retirement Living strategy is under review, and we expect to update the market on this later in the financial year. I'm pleased with the progress Regis has made in the environmental, social and governance domains. The company is proud of our history and our work to create shared value in what is an essential industry for the Australian community. I have included a range of achievements on this slide across our recycling and sustainable consumable initiatives and environmental upgrades to our homes and offices. Our social programs have been driven by the changed environment associated with COVID-19 and finding new ways for our residents and clients to connect with their loved ones and communities, as visitor restrictions have been applied in different jurisdictions. We have introduced a range of new virtual forums and communications to increase interaction between the executive and management teams and to provide leadership, mental health and wellness in services. From a governance perspective, Regis has a majority independent Board as well as our 2 founding directors, and we have a proper focus on our governance obligations. Rick and I have both spoken of the company's pause on developments due to the ongoing uncertainty around future funding and return on capital. In the background, we continue to plan for future developments and have projects ready to commence as soon as conditions improve. In that regard, I'm pleased to advise that we acquired a parcel of land in Belrose, New South Wales in August for a new residential aged care home. So I'd like to finish today by providing some brief statements about the outlook for the company. Regis continues to prioritize our key drivers of quality care, service and accommodation. High performance in these areas will support the continued improvement in occupancy, which is a focus for us. Our key drivers are themselves supported by the workforce strategy and upgrade of our key business systems taking into account our own requirements and ambitions as well as those considered by the sector reform agenda. The company eagerly anticipates the necessary conditions to recommence our development program. We know that there is a substantial number of aged care homes in Australia that are well beyond end of life and contemporary standards. With the right conditions, Regis will continue to build contemporary fit-for-purpose and desirable aged care homes for older Australians. Regis intends to expand our existing home care services in terms of package numbers, service offerings and service locations. As mentioned earlier, we have sufficient headroom and a strong balance sheet position to take advantage of market opportunities over the coming years. Given the current macroeconomic environment, including the ongoing impact of the COVID-19 pandemic, the Board does not believe it to be prudent to put forward any earnings guidance at this stage. A business update will be provided at the Annual General Meeting on the 26th of October. And I'll now hand back to the operator to open up to questions.

[Operator Instructions] Your first question comes from Tom Godfrey from MST.

Can you hear me okay?

Yes, we can. Thanks, Tom.

Great. Maybe just first question, if I could start with revenues. Just looking at your government revenue per occupied bed day and Rick, appreciate you did give some color on this in your prepared remarks, but up 5.6% year-on-year. If we strip out the COVID at about 1.6%, you're still looking at sort of 4% growth there. It just -- it feels like that's running well ahead of what we've seen in terms of acuity for the last sort of 2 to 3 years. Can you just give us a bit more color around what might be driving that? Has the ACFI scoring process changed? Just any additional color you can give?

So Tom, I'm happy to take that one. We continue to see an increase in the acuity of residents across our residential aged care homes and particularly. As restrictions have been applied to touring new homes, it has delayed entry for a number of older people. New entrants tend to have lower ACFI than people who have been in aged care for a period of time. So it actually pushes your average up. We would expect that as our new entrants increase with the relaxation of some of the COVID restrictions that we have, you might actually see that average ACFI come back down as it balances out. But we've also had a very strong focus on ensuring that we capture all of the ACFI revenue that is due to us.

Got it. So would you expect some of that unwind to maybe come through in FY '22 and/or is it still just sort of holding at that higher level?

No, it's holding.

Got it. Okay. That's very helpful. Maybe second question just to some of the comments around ongoing shift from pure play RADs to combos and DAPs. Given the inherent sort of lag in the numbers that you're reporting today versus what you guys can actually see, what's your expectation for FY '22? Should we expect that shift to continue, accelerate, decelerate? What's your sort of view medium turnaround RAD/DAP?

So in my view, look, a couple of months into the financial year, Tom, is that I think we're holding. So that 57% that you're seeing there on Slide 14 is what we're continuing to see. I think given the initiatives we've got in place, which is a balancing act between profit versus RADs, I think that 57% will hold.

Got it. That's helpful. And maybe just a last 1 for me, a bit sort of longer term, and I appreciate there's still a lot of uncertainty around the government reforms Linda, but you did sort of referenced the activity-based funding model and the transition that we're expecting, I think, in the sort of government time lines, it's an FY '23 transition. So we should expect to sort of get some of that detail around the AN-ACC pricing in the next 6 to 12 months. Just interested in your view around that timing there? And then also, just your comments around Regis being well placed to sort of benefit from that model. Any sort of comments you can give around why you think that is?

Sure. Thanks, Tom. So addressing the timing first. So there are a couple of things at play here. One is that the government is partway through a shadow assessment program of all residents across the country. We don't have any information from that shadow assessment program at this point. So we can see what the model looks like, but we don't know at this point where our residents sit in that model. Secondly, we don't have the price that will plug into the AN-ACC model, and that price will be set and then monitored by the independent hospitals and aged care pricing authority as it will be known going forward. So we're actually missing some of the key components of information there to be able to do our modeling properly. But we are expecting that we will hear something about shadow assessment, I would say, within the next 6 months. And then we are offering our data and systems access to IPA, so that they can do the work that they need to do as well. In terms of our position, so you might have heard me speak before, I've worked with activity-based funding models for the last 2 decades and have a number of our executives who have also worked with activity-based funding models. So we are -- with the information that we have to hand now, we are preparing all of our systems to place us in the best possible place for the independent assessment model and to make sure that our residents are classified correctly. And again, that we are able to gather all of the revenue that we would expect to see for the acuity of our residents.

No, that makes sense. And just very quickly, Linda, given we didn't see anything sort of allocated towards AN-ACC in the forward estimates, is it your sort of sense that it will be just see a redistribution of the current pie? Or is there still a chance that yes, that there might be some incremental funding allocated to it?

So we are expecting that there will be an increase. I don't think it will be a redistribution of the same pie. You can look at the forward estimates in terms of the money that is being put into the system by the Australian government. So I think the way I'm looking at it is that it would be at least equivalent, but I'm expecting it to be higher.

Your next question comes from David Low from JPMorgan.

Just to follow up on Tom's question. Rick, in the past, you've talked about heading into the changes in FY '23 some of those costs would have to start to come through in FY '22. Just wondering whether you're still of that view?

David, are you talking specifically around care costs or?

Yes. Look, I think in the past in the conversation we've had, you talked about as we move into the new rules with the minimum number of minutes per resident, notwithstanding some of the uncertainty around it, that it would be impossible to switch that on, on day 1, and therefore, some of those costs would start to show up in this current financial year. Is that the right way to think about it?

Well, I'm not really sure, David, because there's still a lack of clarity around what's included in the 200 minutes. So I'd struggle to answer that question. So we need the government over the next few months as to what's actually going to be included in there.

The other thing I might just add to that, David, is government has recently advised that it will be in average 200 minutes and that it will flex according to acuity of the residents in that particular home. So again, until we've got the shadow assessment coming through. And government provides the links between those shadow assessments and the average number of minutes that they would expect, it's really difficult for us to model.

Just remind me, when do you expect this regulation to come into affect?

Well, I think the actual requirement for the 200 minutes kicks in, in '23, the funding...

Yes, July 1.

If the funding starts sort of later it's sort of in '22. So -- but we expect to know more in the next 6 months, I guess, around what's going to happen going forward on care funding.

Okay. All right, different topic, similar theme. So COVID costs, the presentation, I think, makes it quite clear that the additional COVID costs were pretty much covered by additional funding from the government. Rick, I think you made sort of comment that now COVID cost just sort of fold into your core. So just wondering how you're thinking about the implications for this year, given there isn't a specific additional funding available.

Yes. Look, I'm glad you've raised it because it's been one that I know a number of analysts have asked. So I'll go back to what we said earlier, of the $11.8 million. $2.1 million of it was expensed in the second half. So we saw a massive drop off between -- as you would expect, between the first half and the second half given the second wave in Melbourne in particular through September to November was where we incurred the major part of cost. So the caveat being that there are no outbreaks that's the caveat here that we expect to save circa $1 million to $2 million going forward. Infection prevention control, PPE, those sorts of costs going forward, David. That's our expectation. That's what we baked into our cost profile.

Okay. So that's $1 million or $2 million this financial?

Yes.

Okay. I know there's no guidance being given, but we're obviously aware of some of the drivers, and I recognize it's a very uncertain period, and particularly with the current lockdowns. But all other things being equal, an additional $10 a day has been received, we know roughly what the indexation is. So am I right in assuming that FY '22 should be a better operational year than FY '21 directionally?

Well, I think we're making the point that we believe it will be a better year. But as I said, no formal guidance. But you're right. I mean, we've received the first payment of the $10. It's actually been paid in arrears. So we received 1/12 of it late July, early August. And as you quite rightly point out, I think it will be the case going into next year, that indexation shortfall which you can mitigate against the $10 will be there this year, and I suspect it will be there next year as well.

Yes. Okay. No, no, I think that's good to hear that you do expect it's a better year. I just struggled a little bit to pick up on that through the presentation, just to be certain. Look, the other question I've got is the penalties and then I wouldn't claim to have looked into them very carefully myself, but 2 clear penalties there. It's not a positive signal for the business. Just can I get you to talk a little bit about whether there's a risk that we'll see further penalties in the future?

Thanks, David. So I'm happy to take that one. And no the penalties are never a good thing for the business, and we much prefer not to have them. The regulatory environment has very much changed over the past 2 years. So the whole sector is seeing increased regulatory scrutiny. And I think that's been reported very broadly. What we can do and what's in our control is to keep improving all of our systems and our processes aligned with the new standards that came into effect on the July 1, 2019 and put ourselves in the best position that we can.

Yes. One last one for me. I mean we heard a little bit about the M&A environment and the balance sheet providing capacity. I also heard commentary about home care being a bit of a focus. Just much if you could give us a little bit more of insight into how you're thinking about the potential to pick up assets versus the regulated environment, perhaps build fresh, greenfields and where home care fits into that plan as well, please?

Yes, sure. So I'm happy to take that one, David. And look, we're planning for both. We've got a detailed home care strategy, and we already have a home care business at Regis. So our home care strategy is a mix of organic growth as well as M&A activity, and that's something that we are looking to execute this financial year. So we're looking very carefully at that. There's a clear business opportunity there. There's another 80,000 packages being released to market, and it's good to have that diversified portfolio. I think we've seen sustained underfunding in residential aged care and more funding go into home care. And we've also seen, particularly with the aging demographic that both streams are going to be heavily under demand going forward. So it makes good business sense to expand into home care. Having said all of that, residential aged care is our absolute bread and butter, and it is where our deep 30-year experience comes from. So we will be looking as well to continue greenfield development. We will look at all M&A opportunities as we already do. And we would expect to see some movement in the market there over the next couple of years as well.

Your next question comes from Matt Johnston from Jarden.

Sorry. Maybe just first one, just on that $7.1 million of the employee underpayment that's gone through the P&L, I'm assuming that, that's prorated across both halves. Is that right, Rick?

Yes, and it would be a full year impact, Matt, so you're quite right in saying that.