Retirement village operators

[thegreatestben]

Inter-generational households likely to become more commonplace in NZ. Not a big part of majority of cultures here but very common in pacific and asian groups.

[Greekwatchdog]

For Bars latest on ARV, OCA and RYM.

Aged Care Sector

More Sellers than Buyers


Over the last six months the three aged care operators with March year ends are down a further ~-20%, with Ryman Healthcare (RYM) the worst performer. Its market cap is now two thirds of what it was a decade ago, when it was about to report annuity earnings of NZ$59m, compared to the all-time high of NZ$187m we expect it to report for FY24. It is easy to look at the share prices and conclude that it is all doom and gloom in aged care land, but we disagree. (1) Care profits are depressed but margins are improving for the first time in a decade, the glass half full approach would suggest we should pay a higher multiple for depressed but recovering earnings. (2) The housing market is weak, with low turnover. But cash recovery is improving for the sector in general and for RYM in particular. (3) We expect the three reporting aged care companies to report the lowest increase in net debt on record for the last six months, with RYM's net debt broadly flat and modest increases for Oceania Healthcare (OCA) and Arvida Group (ARV). Against that we have lower growth, though with an average multiple of ~0.5x NTA it is unlikely to be the impediment for a re-rating. Instead, we believe investors are concerned about potential capital raises. We do not believe the aged operators need, will, or should raise capital. But never say never; market caps close to or below net debt tend to stress investors out. We believe all eyes will be on communication around capital needs and cash generation. A weak message is unlikely to be taken well.

What have we learnt since last reporting season? Care occupancy improving, villas selling well, apartments and care suites less so


All four main listed aged care companies have either reported, or recently guided to, sales for the six months to March 2024. On average resales were up ~+15% year-on-year from a weak March 2023 period, with OCA having the strongest (+30%) and ARV the weakest (+12%). The more cyclical new sales have a wider spread. ARV's villa heavy period grew +26% and RYM's service apartment heavy deliveries and inventory was weak, down -10% YoY. Summerset (SUM) delivered solidly on both. In aggregate, the sector will deliver all-time high ORA sales, up +15% YoY (+10% ex. SUM) during a recession. Hardly a sector in structural decline. Occupancy in care has continued to improve. This comes on top of increased funding, ~+10% per bed as of July 2023, and reduced wage inflation.

Net debt finally starting to plateau — counter-cyclical cash generation evident in the sector's first downturn


The NZ aged care sector is experiencing its first housing downturn since listing. RYM and ARV have lowered build rates and we estimate OCA will only start one new major construction in FY25. The reduced build rates are slowly making their way to improved cash flow. We expect net cash generation for the first time in FY25. The ability to reduce capex substantially, should the weak housing market persist, is the main reason we think the aged care operators do not need more capital. At current valuations it would be highly dilutive to raise capital. Unless forced by the banks, something we see as highly unlikely, we see a low risk for capital raises.

Operating expenses a potential source for disappointment


In tough times developers tend to give incentives to prospective buyers rather than cut pricing. The aged care sector is no exception. However, rather than showing up as reduced margins, our understanding is that these incentives appear in the opex line. One of the many quirks with the non-GAAP reporting by the aged care sector. These incentives are difficult to quantify and are not reported separately. SUM reported opex growth of +24% in 2H23, substantially ahead of our estimates. We believe partly driven by incentives.

RYM may provide a strategy refresh — the devil will be in the details


With a new Executive Chair and a new CFO, RYM will line up a fresh management. This comes with risks and opportunities. We expect RYM to accelerate its communicated shift of focus from underlying earnings to cash generation. Related, we believe RYM may substantially reduce its medium-term development ambitions and focus on reduced costs and increased steady state revenues.

A look ahead to FY24 earningsA look ahead to FY24 earnings

• (1) Recent sales updates mixed but speak to the underlying growth and resilient margins: Resales are broadly back on trend while the more cyclical new sales appear mixed. But overall sales are growing despite the backdrop of a weak housing market.
• (2) Care is improving: Government funding and occupancy have improved, cost inflation has subsided, each beneficial to margins.
• (3) A more optimistic outlook: Aged care sector was the most upbeat on current demand and outlook in our latest business survey.
• (4) Valuation attractive: Multiples have de-rated materially despite improving cash flows and solidly growing annuity earnings.

We also provide company specific earnings previews with key areas of focus for RYM, ARV, and OCA ahead of their FY24 results.

(1) Recent sales updates are mixed but speak to the underlying growth & resilient margins


All four aged care companies have either reported (OCA, ARV, and SUM) or given recent detailed guidance (RYM) on sales for the six months to March 2024 period. In aggregate these point to ORA sales up +15% versus an admittedly weak 2H23. Resales will grow ~+18% (+15% excluding SUM) and new sales +10% (broadly flat excluding SUM). Resales are now back to trend with growth of ~+8% annually. Importantly, potentially reduced development pipelines will have only a marginal impact on this resales growth rate over the next five years, as resales are modest in villages younger than five years. ARV has also released expected resale margins (largely flat year-on-year). RYM pointed to margins being down (we estimate ~-4 percentage points) while we expect OCA's to be broadly flat. Overall, resale margins have held up well given the soft housing market.

New sales paint a different picture relative to resales, with RYM in particular looking weak, down -22% year-on-year in FY24. RYM cited new sales weakness in four ‘problem’ villages as the key reason for its profit downgrade in February 2024. While we acknowledge the poor relative performance for RYM, we believe some of this relates to RYM's change of focus, from underlying earnings (which only requires a deposit), to cash flow (which aligns better with how SUM reports). Looking at cash collected from new sales (as a proxy for settled sales), we expect RYM to report settled sales down -3% year-on-year in FY24 after +17% in FY23.

(2) Care is improving


Change in care profitability is predominantly a function of three factors: (1) government funding, (2) occupancy, and (3) wage inflation. During the COVID impacted years from 2020–23 all three of these factors negatively impacted profitability. Government funding did not keep up with steady-state cost growth, occupancy declined, and we estimate that wage inflation at times ran at double digits. Over the last 12 to 18 months these three factors have all turned from net negatives to net positives. Occupancy is improving, we estimate a further one percentage point on average on an underlying basis in 2H24, care funding increased by ~+10% per bed from July 2023, above general cost increases, and wage inflation has likely moderated substantially. Outside of OCA, the aged care operators do not report care profitability. However, our proxy for aged care EBITDA margins point to the first improvement in a decade in FY24. For bellwether RYM we expect margins to increase by approximately five percentage points, from ~6% to ~11% in FY24.

(3) A more optimistic outlook


Our Forsyth Barr Pulse of NZ Business survey (conducted in April 2024) highlighted respondents from the aged care sector as the ones with both the most positive outlook on profit view for the next 12 months and on current demand. This compares to being one of the least optimistic 18 months ago. While we should have paid attention then, we think it is worth paying attention now.

Ryman Healthcare (RYM)


RYM will report its FY24 result on Monday, 27 May. While its February downgrade gave some insight into the drivers of the result, we expect the key focus areas to be:

• Strategy refresh: An update on RYM's strategic shift from underlying earnings to metrics more aligned with medium-term cash generation. Specifically, we expect RYM to reduce focus on new sales gains, something we see as positive. Related, we expect to see an increased focus on cost control and cash generation of the existing business.
• Cash flow breakeven for FY25: At its capital raise in February 2023 RYM stated an ambition to be cash flow positive in FY25. It has since communicated (February 2024) that it expects net debt to be broadly flat in 2H24. We expect RYM to reiterate its ambition to being cash flow positive in FY25, but it will depend on whether RYM wants to accelerate the completion of the four main buildings currently under construction and its expectations for new sales out of existing inventory. It is not a given.
• FY25 build rate: At its capital raise, the previous management guided for unit deliveries of 750–800 (FY24) and 850–900 (FY25) and a substantial increase over the following years. At its 1H24 results RYM lowered expectations for FY24 and stated that its medium-term build rate would be reviewed at its FY24 results, coming up now in May. We expect 650 deliveries for FY24 (bottom end of revised guidance) and 720 deliveries for FY25. We expect its revised medium-term build rate to be a combination of ‘it depends on demand’ as well as an indication that ~700–900 units should be expected under normal circumstances.
• Care profitability: Care fees grew a very strong +18% in 1H24. We expect continued strong growth in 2H24 (+15%) driven by increased funding, increased beds, and increased occupancy. Some of this will be offset in higher costs, but we expect margins to expand approximately five percentage points in FY24 versus FY23.
• Problem villages: We expect to receive an update on progress RYM has made in finishing its five impacted sites. At its 1H24 result RYM expected a total capital recycling deficit of ~NZ$370m from these five sites. We will look for commentary as to whether this has expanded given the negative trading update in February.

Arvida Group (ARV)


ARV will report its FY24 result on Tuesday, 28 May. It has pre-released most key details, both new and resales (including volumes, margins, and values) and debt levels. We expect the key focus areas at its FY24 result to be:

• Cash flow drivers: ARV's update indicated better-than-expected net debt over 2H24. The drivers of this result will be important; cash collections of sales were weak in 1H24 and it appears this has recovered through 2H24 along with improved reported sales. But the devil will be in the details.
• Care profitability: ARV indicated care occupancy had improved one percentage point over 2H24 versus 1H24, along with the benefit of a full period of improved care funding, we believe this will contribute to improved care profitability.
• Apartment heavy pipeline: In FY25 ARV is due to complete its Queenstown Country Club apartments and care (~60% of its FY25 build rate guidance). Beyond FY25 ARV's development pipeline at its opened villages is ~70% apartments and care. Offsetting this is its three new large villa-focused developments (no apartments), but these sites are yet to start construction.

Oceania Healthcare (OCA)


OCA will report its FY24 results on Friday, 24 May. While it has pre-released sales volumes we expect the key focus areas to be:

• Net debt: OCA indicated it believed it was at ‘peak net debt’ at both its FY23 and 1H24 results. Following its soft 2H24 sales update (primarily driven by new sales), we believe 2H24 net debt will see an increase again. We estimate net debt ~+NZ$50m over 2H24 to NZ$650m (consensus: ~NZ$630m). We still believe net debt will fall over the medium term, with the delay due to housing market conditions rather than anything structural. We will look for OCA to reiterate peak-net-debt target again at its FY24 result.
• Care earnings: As mentioned, 2H24 will be the first full half under the new funding arrangement. OCA is the most exposed to care of the four large listed operators, and has had its care EBITDA margins fall. OCA's results will be impacted by multiple sales executed at the end of 1H24, which will impact both revenues and costs (in approximately equal measure).
• Longer-term build rate/selling down its elevated inventory: OCA could provide more colour on its build rate beyond FY25 to further cement its ability to reduce net debt. OCA's elevated inventory could allow it to retain new sales around our current estimates, but dramatically reduce build rate over FY26/FY27, allowing lower capex and a fall in net debt through FY25 and FY26.
• The Helier: Recent sales updates and care occupancy on its flagship development will be important. The Hellier will initially be a meaningful drag on profitability as it takes time to increase occupancy. Recent commentary indicated The Helier has been selling down okay; this, combined with care occupancy, will be important given the villages high fixed opex base since it opened.

[ValueNZ]

For Bars latest on ARV, OCA and RYM.

Aged Care Sector

More Sellers than Buyers


Over the last six months the three aged care operators with March year ends are down a further ~-20%, with Ryman Healthcare (RYM) the worst performer. Its market cap is now two thirds of what it was a decade ago, when it was about to report annuity earnings of NZ$59m, compared to the all-time high of NZ$187m we expect it to report for FY24. It is easy to look at the share prices and conclude that it is all doom and gloom in aged care land, but we disagree. (1) Care profits are depressed but margins are improving for the first time in a decade, the glass half full approach would suggest we should pay a higher multiple for depressed but recovering earnings. (2) The housing market is weak, with low turnover. But cash recovery is improving for the sector in general and for RYM in particular. (3) We expect the three reporting aged care companies to report the lowest increase in net debt on record for the last six months, with RYM's net debt broadly flat and modest increases for Oceania Healthcare (OCA) and Arvida Group (ARV). Against that we have lower growth, though with an average multiple of ~0.5x NTA it is unlikely to be the impediment for a re-rating. Instead, we believe investors are concerned about potential capital raises. We do not believe the aged operators need, will, or should raise capital. But never say never; market caps close to or below net debt tend to stress investors out. We believe all eyes will be on communication around capital needs and cash generation. A weak message is unlikely to be taken well.

What have we learnt since last reporting season? Care occupancy improving, villas selling well, apartments and care suites less so


All four main listed aged care companies have either reported, or recently guided to, sales for the six months to March 2024. On average resales were up ~+15% year-on-year from a weak March 2023 period, with OCA having the strongest (+30%) and ARV the weakest (+12%). The more cyclical new sales have a wider spread. ARV's villa heavy period grew +26% and RYM's service apartment heavy deliveries and inventory was weak, down -10% YoY. Summerset (SUM) delivered solidly on both. In aggregate, the sector will deliver all-time high ORA sales, up +15% YoY (+10% ex. SUM) during a recession. Hardly a sector in structural decline. Occupancy in care has continued to improve. This comes on top of increased funding, ~+10% per bed as of July 2023, and reduced wage inflation.

Net debt finally starting to plateau — counter-cyclical cash generation evident in the sector's first downturn


The NZ aged care sector is experiencing its first housing downturn since listing. RYM and ARV have lowered build rates and we estimate OCA will only start one new major construction in FY25. The reduced build rates are slowly making their way to improved cash flow. We expect net cash generation for the first time in FY25. The ability to reduce capex substantially, should the weak housing market persist, is the main reason we think the aged care operators do not need more capital. At current valuations it would be highly dilutive to raise capital. Unless forced by the banks, something we see as highly unlikely, we see a low risk for capital raises.

Operating expenses a potential source for disappointment


In tough times developers tend to give incentives to prospective buyers rather than cut pricing. The aged care sector is no exception. However, rather than showing up as reduced margins, our understanding is that these incentives appear in the opex line. One of the many quirks with the non-GAAP reporting by the aged care sector. These incentives are difficult to quantify and are not reported separately. SUM reported opex growth of +24% in 2H23, substantially ahead of our estimates. We believe partly driven by incentives.

RYM may provide a strategy refresh — the devil will be in the details


With a new Executive Chair and a new CFO, RYM will line up a fresh management. This comes with risks and opportunities. We expect RYM to accelerate its communicated shift of focus from underlying earnings to cash generation. Related, we believe RYM may substantially reduce its medium-term development ambitions and focus on reduced costs and increased steady state revenues.

A look ahead to FY24 earningsA look ahead to FY24 earnings

• (1) Recent sales updates mixed but speak to the underlying growth and resilient margins: Resales are broadly back on trend while the more cyclical new sales appear mixed. But overall sales are growing despite the backdrop of a weak housing market.
• (2) Care is improving: Government funding and occupancy have improved, cost inflation has subsided, each beneficial to margins.
• (3) A more optimistic outlook: Aged care sector was the most upbeat on current demand and outlook in our latest business survey.
• (4) Valuation attractive: Multiples have de-rated materially despite improving cash flows and solidly growing annuity earnings.

We also provide company specific earnings previews with key areas of focus for RYM, ARV, and OCA ahead of their FY24 results.

(1) Recent sales updates are mixed but speak to the underlying growth & resilient margins


All four aged care companies have either reported (OCA, ARV, and SUM) or given recent detailed guidance (RYM) on sales for the six months to March 2024 period. In aggregate these point to ORA sales up +15% versus an admittedly weak 2H23. Resales will grow ~+18% (+15% excluding SUM) and new sales +10% (broadly flat excluding SUM). Resales are now back to trend with growth of ~+8% annually. Importantly, potentially reduced development pipelines will have only a marginal impact on this resales growth rate over the next five years, as resales are modest in villages younger than five years. ARV has also released expected resale margins (largely flat year-on-year). RYM pointed to margins being down (we estimate ~-4 percentage points) while we expect OCA's to be broadly flat. Overall, resale margins have held up well given the soft housing market.

New sales paint a different picture relative to resales, with RYM in particular looking weak, down -22% year-on-year in FY24. RYM cited new sales weakness in four ‘problem’ villages as the key reason for its profit downgrade in February 2024. While we acknowledge the poor relative performance for RYM, we believe some of this relates to RYM's change of focus, from underlying earnings (which only requires a deposit), to cash flow (which aligns better with how SUM reports). Looking at cash collected from new sales (as a proxy for settled sales), we expect RYM to report settled sales down -3% year-on-year in FY24 after +17% in FY23.

(2) Care is improving


Change in care profitability is predominantly a function of three factors: (1) government funding, (2) occupancy, and (3) wage inflation. During the COVID impacted years from 2020–23 all three of these factors negatively impacted profitability. Government funding did not keep up with steady-state cost growth, occupancy declined, and we estimate that wage inflation at times ran at double digits. Over the last 12 to 18 months these three factors have all turned from net negatives to net positives. Occupancy is improving, we estimate a further one percentage point on average on an underlying basis in 2H24, care funding increased by ~+10% per bed from July 2023, above general cost increases, and wage inflation has likely moderated substantially. Outside of OCA, the aged care operators do not report care profitability. However, our proxy for aged care EBITDA margins point to the first improvement in a decade in FY24. For bellwether RYM we expect margins to increase by approximately five percentage points, from ~6% to ~11% in FY24.

(3) A more optimistic outlook


Our Forsyth Barr Pulse of NZ Business survey (conducted in April 2024) highlighted respondents from the aged care sector as the ones with both the most positive outlook on profit view for the next 12 months and on current demand. This compares to being one of the least optimistic 18 months ago. While we should have paid attention then, we think it is worth paying attention now.

Ryman Healthcare (RYM)


RYM will report its FY24 result on Monday, 27 May. While its February downgrade gave some insight into the drivers of the result, we expect the key focus areas to be:

• Strategy refresh: An update on RYM's strategic shift from underlying earnings to metrics more aligned with medium-term cash generation. Specifically, we expect RYM to reduce focus on new sales gains, something we see as positive. Related, we expect to see an increased focus on cost control and cash generation of the existing business.
• Cash flow breakeven for FY25: At its capital raise in February 2023 RYM stated an ambition to be cash flow positive in FY25. It has since communicated (February 2024) that it expects net debt to be broadly flat in 2H24. We expect RYM to reiterate its ambition to being cash flow positive in FY25, but it will depend on whether RYM wants to accelerate the completion of the four main buildings currently under construction and its expectations for new sales out of existing inventory. It is not a given.
• FY25 build rate: At its capital raise, the previous management guided for unit deliveries of 750–800 (FY24) and 850–900 (FY25) and a substantial increase over the following years. At its 1H24 results RYM lowered expectations for FY24 and stated that its medium-term build rate would be reviewed at its FY24 results, coming up now in May. We expect 650 deliveries for FY24 (bottom end of revised guidance) and 720 deliveries for FY25. We expect its revised medium-term build rate to be a combination of ‘it depends on demand’ as well as an indication that ~700–900 units should be expected under normal circumstances.
• Care profitability: Care fees grew a very strong +18% in 1H24. We expect continued strong growth in 2H24 (+15%) driven by increased funding, increased beds, and increased occupancy. Some of this will be offset in higher costs, but we expect margins to expand approximately five percentage points in FY24 versus FY23.
• Problem villages: We expect to receive an update on progress RYM has made in finishing its five impacted sites. At its 1H24 result RYM expected a total capital recycling deficit of ~NZ$370m from these five sites. We will look for commentary as to whether this has expanded given the negative trading update in February.

Arvida Group (ARV)


ARV will report its FY24 result on Tuesday, 28 May. It has pre-released most key details, both new and resales (including volumes, margins, and values) and debt levels. We expect the key focus areas at its FY24 result to be:

• Cash flow drivers: ARV's update indicated better-than-expected net debt over 2H24. The drivers of this result will be important; cash collections of sales were weak in 1H24 and it appears this has recovered through 2H24 along with improved reported sales. But the devil will be in the details.
• Care profitability: ARV indicated care occupancy had improved one percentage point over 2H24 versus 1H24, along with the benefit of a full period of improved care funding, we believe this will contribute to improved care profitability.
• Apartment heavy pipeline: In FY25 ARV is due to complete its Queenstown Country Club apartments and care (~60% of its FY25 build rate guidance). Beyond FY25 ARV's development pipeline at its opened villages is ~70% apartments and care. Offsetting this is its three new large villa-focused developments (no apartments), but these sites are yet to start construction.

Oceania Healthcare (OCA)


OCA will report its FY24 results on Friday, 24 May. While it has pre-released sales volumes we expect the key focus areas to be:

• Net debt: OCA indicated it believed it was at ‘peak net debt’ at both its FY23 and 1H24 results. Following its soft 2H24 sales update (primarily driven by new sales), we believe 2H24 net debt will see an increase again. We estimate net debt ~+NZ$50m over 2H24 to NZ$650m (consensus: ~NZ$630m). We still believe net debt will fall over the medium term, with the delay due to housing market conditions rather than anything structural. We will look for OCA to reiterate peak-net-debt target again at its FY24 result.
• Care earnings: As mentioned, 2H24 will be the first full half under the new funding arrangement. OCA is the most exposed to care of the four large listed operators, and has had its care EBITDA margins fall. OCA's results will be impacted by multiple sales executed at the end of 1H24, which will impact both revenues and costs (in approximately equal measure).
• Longer-term build rate/selling down its elevated inventory: OCA could provide more colour on its build rate beyond FY25 to further cement its ability to reduce net debt. OCA's elevated inventory could allow it to retain new sales around our current estimates, but dramatically reduce build rate over FY26/FY27, allowing lower capex and a fall in net debt through FY25 and FY26.
• The Helier: Recent sales updates and care occupancy on its flagship development will be important. The Hellier will initially be a meaningful drag on profitability as it takes time to increase occupancy. Recent commentary indicated The Helier has been selling down okay; this, combined with care occupancy, will be important given the villages high fixed opex base since it opened.

More sellers than buyers?

Really Forsyth Bar analysts?

[Greekwatchdog]

More sellers than buyers?

Really Forsyth Bar analysts?

Yes really.

[ValueNZ]

Yes really.

Market prices are a function of the willingness of buyers and sellers to transact at a given price. Retirement village stock prices have fallen because the number of shares that people want to sell at a given price exceeds the number of shares people want to buy at that price, therefore sellers drop their prices to be able to clear their shares. Number of sellers and buyers are irrelevant.

There can be 1 very large buyer and 1000 small sellers, and the price can go up as the buyer wants to buy more shares than the sellers are willing to sell at the given price.

The number of shares sold will always equal the number of shares bought.

[Greekwatchdog]

Market prices are a function of the willingness of buyers and sellers to transact at a given price. Retirement village stock prices have fallen because the number of shares that people want to sell at a given price exceeds the number of buyers at that price, therefore sellers drop their prices to be able to clear their shares. Number of sellers and buyers are irrelevant.

There can be 1 very large buyer and 1000 small sellers, and the price can go up as the buyer wants to buy more shares than the sellers are willing to sell at the given price.

The number of shares sold will always equal the number of shares bought.

Depends on your interpretation of the head line. Don't think its about number of shares.