Summerset Group IPO

[rmbbrave]

AMP to list retirement village unit

AMP Capital Investors has confirmed plans to float Summerset Group, one of the country's biggest retirement village businesses, on the sharemarket.

AMP said today the share offer would open in August. AMP will retain 20 per cent of Summerset and sell new and existing shares comprising 80 per cent of the company. The fund manager bought the Paraparaumu-based Summerset for $125 million in late 2005.

Summerset was set up in 1994, and its first village opened in 1997. It now has 11 villages, including ones at Trentham, near Porirua, and at Paraparaumu, and wants to own 20 villages by 2011. It had 770 units at the end of last year and plans to increase that to 2086 within four years.

Summerset chief executive Norah Barlow said this week the company had net assets worth $200 million, with a "conservative" debt level.

Brokers First NZ Capital and ABN Amro Rothschild have been appointed joint lead managers of the float.

AMP's announcement today follows a Dominion Post story on Wednesday which said AMP was looking to list Summerset. Existing listed retirement village operators include Ryman Healthcare and Metlifecare

[Bling_Bling]

Would like more comments on this float. Is it worth having a look at or just another private equity selling their holding to the public?

[rmbbrave]

Nothing retiring about Summerset's float
5:00AM Friday July 20, 2007
By Liam Dann


The interior of one of the units at Summerset.
The NZX will get a much-needed shot in the arm with the float of AMP Capital's retirement business, Summerset, which is expected to list in September with a value over $350 million.

AMP Capital is to float 80 per cent of the business with the offer opening in August.

The $300 million expected to be raised makes it the biggest stock market float since 25 per cent of lines company Vector was listed in 2005.

NZX products group manager Geoff Brown described the float as a "healthy fillip" for the market.

Takeovers have wiped $12 billion of capital off the market in the past two years, with just $3 billion coming back by way of new listings.

Brown said the Summerset float was hugely positive, not just because of its size, but because it was in a sector with a great deal of investor appetite.

The fact that this was a private equity group selling back to the investing public was also a positive.

"It follows a similar process they undertook with Methven and I think that's great for the market."

Brown said Methven, a manufacturer of shower and tap fittings, had been a wonderful success.

Summerset, which has 10 villages providing accommodation for 1600 people, will join rival operators Ryman Healthcare and Metlifecare on the stock exchange.

It will be the third-largest retirement home operator by market capitalisation but aims to grow rapidly in the next few years.

It plans to have 20 villages complete or under development by 2011.

Villages are planned in Hastings, Waimauku, Warkworth, Karaka and Katikati.

Earlier this month, Summerset announced record pre-sales of $6.5 million for its $50 million Warkworth Village.

Chief executive Norah Barlow said at the time that the strong sales reflected the continued growth in demand for the lifestyle offered by retirement villages.

"While penetration rates for retirement villages have increased from 3 per cent in 1999 to around 4.3 per cent, they are still relatively low by international standards, which suggests demand will continue," she said.

With its head office at Paraparaumu near Wellington, Summerset was founded in 1994.

AMP Capital bought it for about $125 million in 2005.

Demographic trends are on the sector's side with the number of people aged over 65 - 512,000 as of 2006 - expected to grow to about 1.3 million by 2050.

But despite the growing market, analysts warn there are still risks in the sector.

It was possible for the level of development to outstrip demand depending on the number of competitors prepared to enter the sector. Operators needed to ensure they were targeting the most profitable segments of the market. Summerset claims to specifically target the middle-market segment.

There are also issues around the supply and price of land as the sector competes with other property developers.

Comparisons between competitors were not always easy to draw, said one analyst, who pointed out that Ryman and Metlifecare traded on vastly different price-to-earnings multiples.

Ryman, with 17 villages and two under construction, has a market capitalisation of $1.07 billion and trades on a multiple of nine times price to earnings (PE).

Metlifecare owns and operates 15 retirement villages, incorporating nine care facilities and seven hospitals.

It has a market capitalisation of $690 million and trades on a PE multiple of 26.

Metlifecare is in expansion mode, having this month announced the acquisition of a Christchurch retirement village and the development of a Takapuna site on the North Shore.

Chief executive Richard de Haast said the key to expansion was putting more residential units on sites it already owned.

With land prices so steep, it had to focus on internal growth and expansion, utilising its "land bank", particularly in areas with the biggest potential: Auckland and the Bay of Plenty.

Metlifecare is tightly held with more than 80 per cent of its stock i

[Hoop]

I'm all eyes and ears on this one. Will be following it carefully. Early days yet. Great booster for our little NZX, may even result in some spillover to other listed NZ stocks.

[AMR]

Definitely worth a look in, you can't deny the fundamentals of the industry look good.

[Paper Tiger]

and I am sure that it would be priced accordingly.

[Paper Tiger]

quote:Originally posted by rmbbrave

Nothing retiring about Summerset's float
5:00AM Friday July 20, 2007
By Liam Dann

...Ryman, with 17 villages and two under construction, has a market capitalisation of $1.07 billion and trades on a multiple of nine times price to earnings (PE).

Metlifecare owns and operates 15 retirement villages, incorporating nine care facilities and seven hospitals....

It has a market capitalisation of $690 million and trades on a PE multiple of 26.


NZX quotes a P/E of 9 for Ryman, heaven only knows how they worked that out. I would suggest the true (historical) number is also 26 or 16-17 if you had in the revaluation gains for property etc.

[Shrewd Crude]

This morning ASB business was talking about this IPO.... and they were quite bullish about summerset... I would tend to agree with the whole long term view on baby boomers going into retirement and increased demand for this sector... BUT.... with property prices heated and likely to fall then this type of investment is likely to fall as it is correlated with housing market fall...
Ryman is in the same position...

In the mean time while we wait for property prices to correct, it will be a good solid investment... I have not looked into the details around the float, and I have not researched this company indepth, DYOR...
[8D]
.^sc

[Halebop]

Long term Demographic trends are positive for the sector.

Short term valuation criteria would be negative. As a commercial operator of real estate assets, NPV / DCF are sensitive to prevailing interest rates. I suspect AMP are trying to pick the top.

[OldRider]

Operation seems very much leveraged to property prices. We have two different couples who are family friends. One couple moved into one of the new villages perhaps a year ago, the others delayed, price this year for lease to occupy - $70,000 dearer than last year. Up about 20%

All my information is second hand from these people, and my interpretation my be a little confused, but it seems to me purchasers get a licence to occupy which must be surrended to the owning company on leaving, with repayment for lease at a discount to the original cost. Lease charges seem moderate, about $4000 annually, this apparently covers most outgoings one would pay for their own property - rates insurance maintenance of dwelling & grounds, so life is simple and thus the scheme has it's appeal.

Profitability seems to me to mostly come from increasing lease purchase price which would have some connection with current house prices, thus my initial conclusion.

[Yossarian]

i'll stick with AVE on the ASX. quality outfit, still trading at lower p/e's than the other main players...

[Dazza]

why sell? where are they using the funds ie the 300 mill they going to get out of this?

definately looking like they going for a kill, 100% gain in 2 years is very good....

[Bling_Bling]

It concerns me when private equity sell down most of their holdings in an IPO. Have to look at the propectus very carefully on this one to convince me. The only reason I am even looking into this is cos the sector is doing very well.

[AMR]

Would have to take a good look at the projections - reading the old Feltex thread has dampened my interest in this IPO.

What are their levels of debt?
Has the market peaked?

[foodee]

Looking from its market (client/customer/consumer) point of view, my feeling is that most of these people would want a 'total package' ie from retirement living to final care.
It appears from summerset website that they are swinging away from 24 hours care and concentrating more on 'serviced apartment' in their more recent development. Seems to indicate that 'age-care' is not as attractive.
Looks more like just a property play

[zyreon]

seems like it's worth a closer look, but we're all going to have to be very careful over the next couple of years as private equity starts selling out to the public. It's a cycle, and now that interest rates are on the rise the private equity boom will probably start to wane a little, thus having seen companies disapear we're likely to see companies return. Private equity is a good thing in general as it cuts out the fat, uses more efficient capital structures and in general adds value... but questions must be asked when the time comes to flick it off to joe-mom&pop-investor.

don't think it will offer much chance to make a quick buck on debut though.... *searches for a prospectus*

[Billy Boy]

I'm a little sceptical on this one.
I think AMP are selling at the top , They have the research teams etc.. They are only keeping 20%, why not keep a controlling interest?
Why would you sell a good earner if in fact it is/gonna be ??
Summerset is established sure but it's a small boy up against two bigger boy's. Takeover target maybe !!
We are in the dark at the moment, lets have a good look when all the splurb is out.
Cheers BB

[Yossarian]

takeover target? I think unlikely. Probably Metlife and ryman have already run their rulers over it and decided not at that price!

[Bling_Bling]

quote:Originally posted by Yossarian

takeover target? I think unlikely. Probably Metlife and ryman have already run their rulers over it and decided not at that price!



I agree. If it is a T/O target they wouldnt need to do a IPO. Not at these price.

[rmbbrave]

Quest for gold in golden years

Two financial giants are going head-to-head for $400 million of investors' cash in two retirement village floats.

Dutch finance group ING yesterday said it would float its villages in Epsom and Remuera, pitching itself against Australian heavyweight AMP to be first to the market with a share offer.

The floats will double the number of listed retirement village operators on the NZX. Ryman Healthcare and Metlifecare are the only current listed eldercare specialists, with a combined market capitalisation of $1.7 billion.

ING wants to raise $100 million from shares in its retirement business which will be called ING Real Living. The float will be managed by Forsyth Barr.

Last month, AMP NZ Capital Investors said it would float 80 per cent of its Summerset retirement village business, which was established in 1994 and owns a string of villages throughout New Zealand.

This float is expected to seek about $300 million, and is likely to be the year's largest.

AMP spokeswoman Jane Anderson could not give any further details on the Summerset float or say when the prospectus would be issued.

But it is understood AMP is aiming to have Summerset listed by September, and Real Living is scheduled to float in late September or early October.

ING, which is floating Real Living with Symphony Investments, said yesterday it was considering developing a further property in Remuera. The company's float would offer up to $100 million of stapled shares.

ING and Symphony are already in partnership, jointly controlling the manager of listed ING Property Trust.

Real Living will be chaired by former Metlifecare chairman Peter Fitzsimmons.

Ricky Ward of Tyndall Investment Management said the two new floats would provide alternatives for investors who could now only get exposure to the sector from two companies.

But some investment analysts said the ING float was far too small to attract interest from big institutions.


ING Real Living

* Raising $100 million.

* Villages in Epsom, Remuera.

* Another village planned.

Summerset

*Aiming to raise $350 million.

* 11 villages, 1600 retirees, 400 staff.

[winner69]

Shoeshine in the NBR gave his thoughts about this the other day ..... very interesting

You can get the independent advisors report when AMP took over Summerset in 2006 off the Companies Office website .... and even though a year or so old Shoeshine says probably hasn't changed much ..... and says that report is a precursor as to what the new IPO might look like.

One quote from that report was 'a potential list price (in an IPO) for Summerset shares would, in our opinion, inevitably trade at a discount to the PE multiplies currently being achieved by Ryman and Metlifecare' .... and so an IPO wasn't considered a good idea then etc

So what is AMPs $125M now worth?

[AMR]

From today's herald:

"On the local scene, AMP Capital pulled its proposed float of rest home operator Summerset in response to the market turmoil. In what would have been only the second IPO of the year, the float was expected to raise around $350 million."

[rmbbrave]

AMP pulls Summerset float
AMP Capital Investors has cancelled plans to float retirement village business Summerset on the sharemarket, blaming turbulence in global financial markets.

AMP had planned to sell 80 per cent of Summerset and hoped to raise up to $304 million. However, market testing of an indicative price range of $1.70 to $1.90 a share

failed to win enough support from share brokers.

AMP managing director Murray Gribben said this morning the float had been deferred after the NZX50 index fell 1.5 per cent yesterday and the Australian S&P200 dropped 3 per cent, mirroring recent international falls.

"Summerset is a quality business which AMP Capital Investors is very pleased to own," Mr Gribben said. "We believe that its inherent value exceeds what the market would be prepared to pay in the current volatile conditions. We are not willing to accept a lower price for the asset and are under no pressure to sell."

Existing shareholders would retain ownership and fund Summerset's development plans. Mr Gribben said AMP could reconsider floating Summerset in the future.

Yesterday the lead brokers of Summerset's float, First NZ Capital and ABN Amro Rothschild, delayed the book build by 24 hours. They said they were reassessing the pricing of the shares in light of "recent uncertainties in global financial markets." The delay would also allow more time to assess Summerset's ability to elect into the Government's new portfolio investment entities (PIE) tax regime, which comes into effect on October 1.

AMP bought Summerset for about $125 million in November 2005.

The promoters of a rival initial public offering by ING and Symphony Investments, of two Auckland retirement villages, are due to start talks with brokers on indicative interest over the next few days. Being managed by Forsyth Barr, the ING and Symphony float is looking to raise about $100 million.

[Paper Tiger]

Well it would appear to be back on again (http://www.nzherald.co.nz/markets/news/article.cfm?c_id=62&objectid=10755122) and with the current owners keeping a majority stake (insert your take on that here :confused:).

I am going a wandering for a while so it can happen without me, but you may (or may not) want to [invest/ignore/make some comment] on this.

regards
Paper Tiger
"I was born under a wandering star"

[CJ]

Well it would appear to be back on again (http://www.nzherald.co.nz/markets/news/article.cfm?c_id=62&objectid=10755122) and with the current owners keeping a majority stake (insert your take on that here :confused:).

I am going a wandering for a while so it can happen without me, but you may (or may not) want to [invest/ignore/make some comment] on this.is any once getting in on this. NO public pool from the looks of things and haven't seen it come through from ASB (haven't been looking though).

http://www.sharechat.co.nz/article/d67b1df0/summerset-bookbuild-comes-in-at-lower-end-of-expected-range-price-set-at-1-40.html

[percy]

I have asked my broker for a prospectus.This sector has been very kind to me.I hold RYM in NZ and ILF in Aussie.I did hold AVE in Aussie,and did well with MET [NZ]a good while ago. Reirement villages and medical supply businesses will keep doing well with the ageing population.l

[Xerof]

RYM are the rolls royce of this sector, Somerset's model is somewhat inferior. (I can't give you full details, but I was at an institutional presentation for the first attempted float a few years ago, and interest was only luke warm then, and consequently deferred) With the price being set at the lower end of the spectrum this time around, don't expect to stag it, but they will probably get this away OK

I'd be really interested to hear SAUCE's opinion on this one, as he knows the sector well by all accounts

[CJ]

my concern is that a PE fund is retaining a 50% stake. PE funds aren't long term holders so that is a huge overhang on the market.

they are probably maintaining 50% to ensure continuity of ownership required to carry forward tax losses - losses are of large value.

[QOH]

Any consensus on this float now ? Anyone interested, for some reason it doesn't inspire me to buy into it.

[percy]

my concern is that a PE fund is retaining a 50% stake. PE funds aren't long term holders so that is a huge overhang on the market.

they are probably maintaining 50% to ensure continuity of ownership required to carry forward tax losses - losses are of large value.

This was one of the reasons I decided not to take up any.I will hold all my Ryman.

[Balance]

This was one of the reasons I decided not to take up any.I will hold all my Ryman.

Not necessarily. Freightways is a good case in point of PE progressively selling out and investors have done well. Agree that's the exception though rather than the rule!

F

[percy]

Not necessarily. Freightways is a good case in point of PE progressively selling out and investors have done well. Agree that's the exception though rather than the rule!

F
Always exceptions.
The major reasons for not taking up Summerset,were;I believe RYM's model of doing ever thing in house is best.I believe RYM's reputation is the best.I believe RYM having more than half their units under 5 years old means there are huge earnings to come from resales.I have met CEO and CFO [and the directors at last AGM] and think a lot of them,and the way they run the business for the residents.They have grown the business without coming back to shareholders.Lastly I
found looking at Summerset made me realise RYM are superior.
thought RYM shareholders would be more stable in the next year or two.I suspose

[Sauce]

I thought the Summerset prospectus was one of the best I have read for quite some time. Hats off to the investment bankers in my opinion. All the relevant information was there, it was clear and easy to understand, and I thought they did a very good job of explaining the revenue model, which is not all that straight forward, the potential competitive advantages (I say potential because the company is not delivering anything close to excess returns at this point in time so technically is not operating within a true quantifiable competitive advantage) and the right amount of detail and historical financial data is supplied to answer most questions. I thought the description of the business and its cashflows was actually much better than that I have seen provided my Ryman.

On the other hand the quality of the investment opportunity itself is more questionable....

Summerset are (quite understandably) attempting to recreate the Ryman model in almost every aspect of their business, but there are a some key differences, both quantitative and qualitative, between the two businesses.

Qualitatively, with the focus on "internalisation of development and project management" you could be forgiven for assuming they are already vertically integrating their business in the manner that RYM are. But this is not the case. As Percy has already pointed out, RYM do every step of the construction process in house including the construction. Summerset are trying to "internalise" the design and project management - and it appears from the prospecus that even these steps will not be fully integrated for another two years. The actual construction is still contracted out.

However they are definitely going down the right path trying to emulate Rymans 'cookie cutter' system, with the full continuum of care, and and trying to bring as much of the process in house as possible. My understanding is that while it sounds easy, and Ryman certainly make it look easy, the reality is that doing this kind of development in house is actually very very difficult.

Quantitatively, you can immediately see the differences between the two businesses showing up in the development margins which are currently about 7% for MET (forecasted to be 12% this year) vs RYMs consistent development margins of around 20 - 25%.

Without analysing average unit prices of each business, it's seems pretty obvious that this massive difference will almost certainly be due in part to the truly integrated in house construction model RYM employ, the lower relative financing costs RYM have due to much lower gearing, the larger scale of RYMs villages, and finally RYMs superior bargaining power with suppliers.

Most importantly, it is critical to realise that from an investor’s perspective Summerset is simply not yet profitable. It's easy to get carried away from what’s really important to investors by focusing on the re-valuations of investment property which ends up on the income statement. This is the wrong way to look at these retirement village businesses. It is not cash income and does not reflect current available cashflow that investors can take out of the business.

It is also wrong to look at the operating cashflow, which simply reflects the cash taken in from the sale of ORAs, most of which cash is refundable. Therefore, while the operating cashflow is useful (free use of the funds) it does not reflect shareholders profit.

The only figure that is really meaningful to investors in the float is the "Underlying Profit". This is basically the "owner earnings" or the profit portion of all their cash flows that could, in theory, be paid out to shareholders.

Looking at summerset on this basis it they have made an economic loss every year. Of course it appears that they are on the brink of a true economic profit FY12 if the pro-forma results are to believed. And it should grow from here as their villages mature and they increase the build rate, and scale of new villages. But there is simply no comparison to the extreme profitability achieved by RYM which can ultimately be purchased at a much cheaper price currently at 2.70 - unless you believe that Summersets cashflows are going to surge dramatically in the next few years, it’s a no-brainer in my opinion.

THe reality is that there is plenty of room for a few quality players to achieve sufficient scale, without destroying anyone’s profitability, for the foreseeable future. Summerset appear to be on the right path - in my very laymans opinion they will need to focus on further integrating the construction process, and building larger and better located villages to achieve this. They might get there in the end, but right now, I believe the business is not worth the asking price based on the current level of true profitability to shareholders, and there is simply a much better and instantly more profitable option in RYMAN to bother with the risks involved investing in the Summerset IPO. The only argument I can see for buying the profitless imitator rather than the incumbent, is that it is coming off a lower base, but, I don't see a ceiling to growth for RYM yet so I believe its an invalid argument.

I also think Summerset is a superior business to METlifecare and a welcome addition to the NZX.

My thoughts for what its worth.

With regards,

Sauce

[Sauce]

I also note the following from the Summerset prospectus:

Firstly, there appears to be no mention of Villa or Apartment Occupancy rates - this would have been fascinating info - although they mention historical care bed occupancy of about 95% in the notes on pro-forma forecast assumptions. For all practical purposes RYM have 100% occupancy across all villages (something retarded like like 0.02pc vacancy at the full year). I think a comparison of vacancy rates would be quite insightful - it's a shame they didn't include this information.

Secondly, it's not totally clear but possibly an important insight comes from the following statement "pre-sales typically commence approximately six months prior to the first villa being completed, with typically over 25% of the units pre-sold by the time the Stage 1 units are ready to be occupied"

RYMs villages are generally 100% sold off the plans. Although the above statement is not totally clear, I suspect Summerset do not enjoy this level of demand, and it's most likely due to poorer location choice and not enjoying the same reputation that persists for RYM villages.

I have heard from within the industry that Summerset mostly does not enjoy prime locations. Anecdotally, I would have thought the Aotea location in Wellington is an average location indeed.

A bit of an 'educated guess' on my part with these points but if I was serious about analysing Summerset as a potential investment these are thoughts I would start exploring.

Cheers

Sauce

[Lizard]

Anecdotally, I would have thought the Aotea location in Wellington is an average location indeed.


Although surely with about 90% more sunshine than the next major village - Ryman's Malvina Major.... great view - when the cloud clears.... :)

[Lizard]

I believe RYM having more than half their units under 5 years old means there are huge earnings to come from resales

I looked at Summerset. Appeared they value their units on a similar basis to RYM, so, given Pr/NTA, Summerset looks cheap by comparison. However, cashflow wise, RYM have this big "bank" of capital gains on the books that will flow through to cash and allow them to keep building new villages out of op cashflow, even if we get flat property prices for another 2-5 years. On balance, I would rather own RYM than Summerset or MET at this point. (Although I'm not a huge fan of either at current prices)

[Xerof]

Thanks SAUCE for your insightful comments. I hope they are of benefit to ST readers who look to invest in this industry. Not my cup of tea, but you support my hunch that Rymans is the better horse in the race

Cheers

[Sauce]

Although surely with about 90% more sunshine than the next major village - Ryman's Malvina Major.... great view - when the cloud clears.... :)

That's true Lizard. I never liked the look of the Malvina Major village. It looks a lot like a giant east-facing disaster just waiting to leak like a sieve.

[Sauce]

Thanks SAUCE for your insightful comments. I hope they are of benefit to ST readers who look to invest in this industry. Not my cup of tea, but you support my hunch that Rymans is the better horse in the race

Cheers

Thanks Xerof. I think your intuition about RYM is spot on.

Regards.

Sauce

[Sauce]

I looked at Summerset. Appeared they value their units on a similar basis to RYM, so, given Pr/NTA, Summerset looks cheap by comparison. However, cashflow wise, RYM have this big "bank" of capital gains on the books that will flow through to cash and allow them to keep building new villages out of op cashflow, even if we get flat property prices for another 2-5 years. On balance, I would rather own RYM than Summerset or MET at this point. (Although I'm not a huge fan of either at current prices)

RYMs embedded gains makes up only a small portion of future cashflows. Indeed, Summerset will also benefit from a similar maturity from deferred development margin (they sell off the plans cheaper than they sell the finished product as do RYM) and from more general past unit inflation also - they have been in business since 1994. In fact they claim to have 119m of embedded gains from both management fees and unit inflation. So their cashflows will mature and grow as well as RYMs.

RYMs ability to build new villages from operating cashflow has more to do with the capital efficiency of the revenue model than the latent ("bank" of) capital gain. When each occupation license represents an interest free 5 - 7 year loan to the developer who can use that to build more units elsewhere, and the original occupant is paid out by the next incoming resident - that's the silver bullet.

Pr/NTA is a not a rational way to value the business/shares in the retirement village industry.

Regards,

Sauce

[Lizard]

Pr/NTA is a not a rational way to value the business/shares in the retirement village industry.


Given most of the property valuations are supposedly based on forecast cashflows, then it is. However, it doesn't mean they should trade on a Pr/NTA of 1 or below either. The difference is what discount rate you are happy with on your investment versus what discount rate they are using to value the units.

[Sauce]

Given most of the property valuations are supposedly based on forecast cashflows, then it is. However, it doesn't mean they should trade on a Pr/NTA of 1 or below either. The difference is what discount rate you are happy with on your investment versus what discount rate they are using to value the units.

Hi Lizard

That's a smart way to think about it: one could say well as an investor I am happy with a 10% return and these valuations were done using a discount rate of 15%, therefore a significant premium (1.5x) to book value is a fair price to pay. But I am quite sure it's not the right way to value these businesses.

As an investor you are buying an ongoing development business - not just a retirement village portfolio - you are concerned with their expansion, build rate and the cashflows from future villages, not just the cashflows from existing villages.

Then there is the issue of the false precision inherent in 40 year projections and the fact we can't actually see the data. Under GAAP when the revaluations ended up in the reserves rather than the income statement the valuations barely rated a mention in company commentary, and it would have been less confusing for investors if it had stayed that way - the industry executives I have spoken to share this view.

But most importantly, as an investor in the shares you need to value the business, not just the village portfolio. The most rational way to simplify this is to focus on the sustainability of the (cash) return on invested capital.

Its the cash profits, and the growth in those cash profits, which is important.

Regards,

Sauce

[Lizard]

Sauce,

The future villages are built out of cashflows from existing villages. Some businesses will give that to you in dividends you can re-invest either with them or elsewhere. Your choice. But counting both the cashflow and the growth that comes from re-investing it is double counting.

As for the other parts of the business model, as far as I can see, nursing care and amenities (with associated amenities fee) and village running costs are all very low margin parts of the model and produce relatively low returns on equity.

[mamos]

Say RYM is earning a 30% Cash ROE with 50% DPR. Cash flows equating to 15% of Equity will be paid out to shareholders as a perpetuity.

The other 15% will be retained in the business and compounded at a 30% ROE.

If you were to assume all the earnings were retained in the business and also counted the dividend flow then this would be double counting.

[Sauce]

The future villages are built out of cashflows from existing villages. Some businesses will give that to you in dividends you can re-invest either with them or elsewhere. Your choice. But counting both the cashflow and the growth that comes from re-investing it is double counting.

Hi Lizard,

Actually, if you use the valuers opinion of the stand alone value of each individual village as a proxy for a valuation for the business, you are NOT factoring the reinvestment of the cashflows. The valuers job is simply to value the underlying asset and the cash it generates. It is NOT their job to value what the company does with that cashflow - its reinvestment growth.

However, a business that can reinvest its cashflows at high rates of return on behalf of shareholders is worth a lot more than a business that pays those cashflows out as a dividend - that is what growth is all about.

If RYMAN decided to stop developing new villages and started paying out 100% of surplus cash as a dividend, the paper valuation of its existing villages would not change, but the value of the company would be dramatically lower - possibly even close to NTA if those valuations are accurate!! http://www.sharetrader.co.nz/images/smilies/wink2.gif

That really is fundamental business economics

Your point about dividends is spot on. The cashflows paid out as divis do not compound and must not be included in any growth calculations. But I definitely do not count the cashflows twice, I separate the dividends and the retained cashflows and value them differently. And the retained cashflows are only worth more than the dividends if the reinvestment return is greater than the cost of capital. There is no double counting at all.

Cheers

Sauce

[Sauce]

As for the other parts of the business model, as far as I can see, nursing care and amenities (with associated amenities fee) and village running costs are all very low margin parts of the model and produce relatively low returns on equity.

Hi again Lizard :)

On the contrary the care fees generate an excellent margin. In 2011 it was 15.4% and the margin has grown every year because the care fees grow as the villages mature (presumably because the original incoming residents get older and require more and more care so the mix of services required in the village changes). The care fee margin has grown consistently every year from 10% five years ago to projected margin of 16% this year.

The care fees are an important part in generating the 30% return on shareholders capital that RYM enjoys.

Regards,

Sauce

[Sauce]

Say RYM is earning a 30% Cash ROE with 50% DPR. Cash flows equating to 15% of Equity will be paid out to shareholders as a perpetuity.

The other 15% will be retained in the business and compounded at a 30% ROE.

If you were to assume all the earnings were retained in the business and also counted the dividend flow then this would be double counting.



Thanks Mamos, that's exactly right.

The reason its best to focus on the cash profits is because that is the cash that is available to us as investors, either reinvested for growth or paid out as a dividend. It encompasses cash generated from all aspects of the business.

But as you point out, they only retain 50% of cash profits in the business for reinvestment, so you must value the dividends and the reinvested cash flows separately. One half as a compounding calculation and the other as a perpetuity.

The hard part, or the "art" if you like, is determining how sustainable the "return on equity" is. As the business gets larger and larger it will be hard to keep lifting the build rate at the rate needed to sustain a 30% return on equity. Hence the early eye towards Australia even with so much growth still to come in NZ.

The other issue is their ability to maintain that growth rate without tripping themselves up - constructing and managing retirement villages and hospitals is a bit more complex than opening McDonalds or Wal-Mart stores!!

Regards,

Sauce

[macduffy]

Thanks, Sauce, for your continuing analysis of the "retirement" stocks. Confirms my own view that RYM leads the field here, both as operator and as an investment.

Regarding the Malvina Major village, while the site is far from ideal, being at the top of the Nauranga Gorge in one of Wellington's most notoriously damp and windy locations, I don't regard the buildings themselves as being prime "leaky" candidates. The original part was of course converted from the old Burma Lodge, built well before leak-prone designs became an issue. The more recent additions don't appear to be particularly susceptible to my layman's eye. Nicely pitched roofs; no concealed guttering. With a bit of luck they learnt the lessons and have avoided the pitfalls - but that may just be wishful thinking on my part, as a RYM shareholder!

[Sauce]

Thanks, Sauce, for your continuing analysis of the "retirement" stocks. Confirms my own view that RYM leads the field here, both as operator and as an investment.

Regarding the Malvina Major village, while the site is far from ideal, being at the top of the Nauranga Gorge in one of Wellington's most notoriously damp and windy locations, I don't regard the buildings themselves as being prime "leaky" candidates. The original part was of course converted from the old Burma Lodge, built well before leak-prone designs became an issue. The more recent additions don't appear to be particularly susceptible to my layman's eye. Nicely pitched roofs; no concealed guttering. With a bit of luck they learnt the lessons and have avoided the pitfalls - but that may just be wishful thinking on my part, as a RYM shareholder!


Hi Macduffy,

I am sure your right it was tongue and cheek. I was mostly agreeing with Lizards assessment of the location. I have an ingrained aversion to plaster clad housing so when I read the RYM annual reports I try very hard not to look at the pictures :)

I am more of a fan of the Rita Angus, its a handy location for the oldies and its made out of brick! ;)

Cheers
Sauce

[Sauce]

I am more of a fan of the Rita Angus, its a handy location for the oldies and its made out of brick! ;)



Just don't mention earthquakes :ohmy:

[SparkyTheClown]

Their next report is due tomorrow, 29th Feb.

Will this middling IPO performer have a nice surprise for those hardy souls who invested, or will it be a middling performance to match the share price?

I believe this is a well managed company in a growth sector. It doesn't have Rymans track record but it looks better on paper than MetLife. They seem to have won a number of awards for quality services to residents, and I like the CEO, Norah Barlow.

My pick, a very good result that hopefully takes the share price to 1.55.

Disc: I hold SUM and RYM

[ratkin]

I now hold SUM too :)

[SparkyTheClown]

A good result, though the stock hasn't moved.

It seems a little unloved by the market, or maybe it hasn't proved itself enough yet to warrant funds buying in.

More broker attention would help. Forsyth Barr cover SUM but I don't know if FirstNZ, HHG or Craig's do yet.

I had been tempted to sell down a bit, but on the basis of today's result, I think I am happy to hold this for a while.

[ratkin]

A good result, though the stock hasn't moved.

It seems a little unloved by the market, or maybe it hasn't proved itself enough yet to warrant funds buying in.

More broker attention would help. Forsyth Barr cover SUM but I don't know if FirstNZ, HHG or Craig's do yet.

I had been tempted to sell down a bit, but on the basis of today's result, I think I am happy to hold this for a while.

I shouldnt worry , Ryman was the same many years ago , unloved and boring , the rat made a killing on that stock , hopefully this one will eventually follow suit

[SparkyTheClown]

Unloved, boring, but with great cash-flow and queues of retirees lining up to move in.

Classic Buffett criteria, I would have thought.

[ratkin]

Good to see one of the directors has been buying on market , even if the amounts are small