Retirement Sector Valuation Criteria

[noodles]

Since buying a small parcel of Metlifecare(MET) shares a couple of weeks back, I've been confused by it's relative under-valuation to other listed retirement village shares. To me, on many fundamental valuations, MET appears cheap compared to it's peers. Obviously, it is not all about fundamentals. Management and other factors must also come into play. It is clear to me that it is way more complex to value these companies compared to say a retail share.


This thread is to discuss valuation criteria of these listed stocks. MET, SUM, and RYM. So I thought I'd kick off a list of criteria. Some criteria are common for most stocks, but I think a few are peculiar to this industry. Please suggest any additions.


-NTA. Net Tangible Assets. A stock would appear to be cheaper if it is valued less than it's NTA
-Price to Earnings Ratio
-Price to Operating Cashflow
Note: Of these 2 ratios, I'm not sure what is more important. I guess it is price to Op cashflow?
-Dividend yield
-Occupancy %
-Sales Settlements (resales and new sales). I guess this could be compared to NTA, Market Cap, or EV so we can get a
comparison with other listed vehicles. But the key here is the growth year on year.
-Number of new units built per year. This could also be compared to NTA, Market Cap, or EV so we can get a comparison with
other listed vehicles. But I thin the key here is the growth year on year.
-debt to equity ratio
-historical earning growth
-future earning growth and PEG
-new sales margin%
-resale margin %
-unrealized gains
-size of land bank relative to construction rate.


Other factors to consider:
-Does the company need to go back to shareholders for additional equity. RYM has never had to do this. MET has done this recently.
-Location. Given the price growth of residential property varies across the country and profit is derived from capital gains, there can be variation between listed vehicles. For instance, MET is mostly based in Auckland and nearby cities. They may get a greater capital gain uplift than other companies.
-Quality of management. Do they deliver on promises?
-Type of care provided. Margins for hospital care beds are higher than rest homes. I think RYM may be better place here.
-What type of agreement they have with their customers. I understand it is deferred settlement. But what percentages are used. Do they differ much between the companies?
- Nature of profits. Do some companies make more from capital gains rather than Care. In which case, what type of profit is more predictable. Surely Care would be better quality earnings.


Of these valuation criteria, I'd be interested to know what people think is the most important. What drives future cash flows!


I also wonder if these stocks are just a bet on residential housing in NZ in general? If so, how important is growth of national house prices on future profitability. What would happen if NZ house price flat-lined or even dropped?

[percy]

Noodles.
For years analysts and commentators have tried to tie the retirement sector to NZ residental housing market.
They have never succeeded .
The retirement sector is driven by,security,safety,and care.

[forest]

Noodles thanks for starting this thread, I am sure this is going to be very educational to many of us.

I have followed this sector and specially RYM. I think you, STC and Percy are right on the pulse with the list of creteria.

I like to add one criteria and that is the proportion of income that come from the residense themself compared with government funded.

I do not have the answer only the expectation that residents funding is more reliable when Gov is short of funds.

Maybe not to much of an issue now but long term when the sector expands greatly, compared to Gov income.

[noodles]

I have spent way too long reading annual reports of the 3 retirement sector stocks. I've come to the conclusion that there is a lot of obfuscation in the reports. All sorts of wonderful figures like net operating cashflows that make you think the company is doing well. In reality, most of the profits come from property revaluations. So I've made my own calculator for cash the company actually generates.

Increase in NTA
+ dividends
- prop revaluations

So how do our operators stack up using this calculation for the last reporting year

	MET	SUM	RYM
Inc Net Assets	40	15	88
+ dividends	0	0	45.5
-Prop Revaluation	92	15	50
CASHFLOWS	-52	0	83.5

All values in millions of dollars


So there you have it. No wonder MET keeps asking for cash. Is it a Ponzi scheme? Summerset is bad. Ryman is above water, but for their market cap, i'd expect a lot more.

Are these stocks just bets on the property market without a decent yield? I may as well look at Property Trusts or residential property.

I'm not an accountant, so happy to be corrected on any of the details.

Any thoughts welcome.

Note: Metlifecare calcs are using the half year results (not the last annual result). Half year result is unaudited. Metlifecare property revaluation include a gain on purchase of assets.

[Snow Leopard]

...

	MET	SUM	RYM
Inc Net Assets	40	15	88
+ dividends	0	0	45.5
-Prop Revaluation	92	15	50
CASHFLOWS	-52	0	83.5

All values in millions of dollars
...

There are two errors that I can spot in your numbers:
MET Inc Net Assets for the Half Year were 179 million (difference from Jun-12 not Dec-11).
RYM Prop Revaluation was 119M (50M Unrealised + 69M Realised).

However the number I believe you are trying to determine is the cash component of the profit which can be determined from the income statement as:
Profit Before Tax - Fair Value Changes.

The cash flow that everybody raves over comes from the increase of occupancy advances as units are:
a) Sold for the first time (net big amount)
b) Resold subsequently (not so big amount)

Occupancy advances are technically a liability so you can find them there.

Best Wishes
Paper Tiger

[noodles]

There are two errors that I can spot in your numbers:
MET Inc Net Assets for the Half Year were 179 million (difference from Jun-12 not Dec-11).

Hi Paper,

I chose to use Dec 11 to Dec 12 to make an annualized value. The net asset value certainly seems to be flying around for MET. If you use your figure (which seems just as valid), MET does look a lot better.

I've tired of doing any more research. I simply can't find value and I need to spend my time researching other stocks.

Treating Occupancy advances as positive cashflow and at the same time as a liability just sounds like funny accounting to me.

Good luck any any holders of the stocks.

[troyvdh]

All this discussion may be well and good ....but given acknowledged realities...i.e. a significant **** load of us will want/need/require entities to care for us ....in our declining years... be they the aforementioned or not...surely none i.e. (MET RYM SUM) will be able to adopt an overwhelming dominance....in providing care for us....given the disparity of wealth i.e.....my father resides in a Bupa home here in CHCH....the state pays Bupa $900 per week....on his behalf....is this sustainable...

[Bjauck]

All this discussion may be well and good ....but given acknowledged realities...i.e. a significant **** load of us will want/need/require entities to care for us ....in our declining years... be they the aforementioned or not...surely none i.e. (MET RYM SUM) will be able to adopt an overwhelming dominance....in providing care for us....given the disparity of wealth i.e.....my father resides in a Bupa home here in CHCH....the state pays Bupa $900 per week....on his behalf....is this sustainable...

It is already becoming unsustainable. In the past some folks in rest homes or nursing homes were able to claim the state subsidy even though they had settled assets (and remained discretionary beneficiaries) into family trusts. Remember Jim Bolger's mother, with a family trust, claiming the subsidy? They are now investigating people with access to family trusts more rigorously. NZ has the greatest number of family trusts per population in the world. It renders the government's social, fiscal and tax policies somewhat pointless if people can avoid them by placing their assets into trusts, whilst also retaining effective control and enjoyment of those same assets.

[Bjauck]

Retirement villages paid no tax - report
http://www.nzherald.co.nz/business/n...ectid=11841788

[beetills]

A lot of these businesses didn't exist when places like TOKANUI were in operation.
Without Govt funding these places would be kaput in a short period of time.
The prices they charge should be under investigation.
If house prices drop what can we expect?I suspect doom and gloom.