Retirement village operators

[Greekwatchdog]

Interest rate hikes trigger biggest property sales slump in almost 40 years - CoreLogic

https://www.newshub.co.nz/home/money...corelogic.html

What you headline doesn't say Bull, Is that since March 2020 Houseprice's went up buy how much? I read last week Houseprice's are still up 20/25 % on pre Covid Levels. Headline sells. Use one of your 12 screens and some real research and report to us.

[bull....]

What you headline doesn't say Bull, Is that since March 2020 Houseprice's went up buy how much? I read last week Houseprice's are still up 20/25 % on pre Covid Levels. Headline sells. Use one of your 12 screens and some real research and report to us.

i can tell by your response you dont understand the implications of the headline so ill be nice and explain it to you

sales slumping mean's it takes longer to sell property
therefore RV sales will be slower as the time taken for one too sell there existing property is longer ( unless you just sell at what ever price ) therefore cashflow is slower for RV this impacting there business

[thegreatestben]

There's plenty of scenarios where the personal home doesn't go on the market.
Family/friends often take the opportunity to move into or purchase the home. I know of about 3 or 4 people in the last year or two who are about to or who have done this. Not everyone moving into a RV needs to put their house on the market.

[justakiwi]

Don't underestimate the reality of this statement. When someone has been thinking about moving into an RV, for some time, and has made the decision to do so, they are psyched up to go ahead and do it. Yes, they will want to get a good price for their house, but when it comes to the crunch, in most cases I suspect they will accept a lower price to "get it done."

It's a bit like when you resign from your job. You don't usually make that decision on the spur of the moment. It's something you have been thinking about for weeks, months, years. When you finally make the decision, you just want to walk out the door. Those last few weeks of whatever notice period you have to give, are a major pita.

This is no different in my opinion. The only exception might be people who have only recently purchased the house they are living in. Those people stand to possibly lose money when they sell. For anyone else, it's not going to be a huge deal. They have already made a significant profit.

Some people might have to lower their sights a little in terms of what they buy into in an RV - maybe they can't buy at the top of the price range now. Not the end of the world.

i can tell by your response you dont understand the implications of the headline so ill be nice and explain it to you

sales slumping mean's it takes longer to sell property
therefore RV sales will be slower as the time taken for one too sell there existing property is longer ( unless you just sell at what ever price ) therefore cashflow is slower for RV this impacting there business

[Greekwatchdog]

i can tell by your response you dont understand the implications of the headline so ill be nice and explain it to you

sales slumping mean's it takes longer to sell property
therefore RV sales will be slower as the time taken for one too sell there existing property is longer ( unless you just sell at what ever price ) therefore cashflow is slower for RV this impacting there business

Thanks Bull, but really I don't need you to tell me what I already know and understand. Part of a long term view when allocating to my Retirement Portfolio is too understand all the positive and negatives..

I am not a trader like you and many others..

[bull....]

Don't underestimate the reality of this statement. When someone has been thinking about moving into an RV, for some time, and has made the decision to do so, they are psyched up to go ahead and do it. Yes, they will want to get a good price for their house, but when it comes to the crunch, in most cases I suspect they will accept a lower price to "get it done."

It's a bit like when you resign from your job. You don't usually make that decision on the spur of the moment. It's something you have been thinking about for weeks, months, years. When you finally make the decision, you just want to walk out the door. Those last few weeks of whatever notice period you have to give, are a major pita.

This is no different in my opinion. The only exception might be people who have only recently purchased the house they are living in. Those people stand to possibly lose money when they sell. For anyone else, it's not going to be a huge deal. They have already made a significant profit.

Some people might have to lower their sights a little in terms of what they buy into in an RV - maybe they can't buy at the top of the price range now. Not the end of the world.

sure a lot of baby boomers are well off and its no problem but there must be plenty who are not so lucky as witnessed in the latest reports from RV operator's they mostly all said new sales were slower , it was re-sales which propped them up. I think they alluded to the fact slower sales of people's homes were affecting there new sales

[Greekwatchdog]

For Bar review Debt of RYM, OCA and ARV

The three aged care stocks with March year ends (Ryman [RYM], Arvida [ARV] and Oceania [OCA]) have tripled net debt over the last five years. As a group, aged care stands out in the NZ market; it has taken on more debt, both absolute and relative, than any other sector. Revaluation gains and capital raises has kept asset leverage largely flat, but in relation to earnings, and certainly cash generation, leverage has increased materially. With weighted interest rates set to double from FY22 to FY24 we have taken a closer look at covenants, interest expense and cash interest to be paid over the FY23–FY25 period. We walk away less concerned that covenants will be breached. On our estimates, P&L debt servicing will consume ~20% of EBIT, up from ~10% during FY18–FY22, and capitalised interest will consume ~10% of new sales cash flow. We expect the ability to reduce the absolute level of net debt will be a key focus for the market over the next 18 months.

Covenants are not created equal; we do not forecast any breaches, and if it gets close, we expect leniency from the banks


The three aged care stocks included in this analysis have similar levels of leverage (net debt/(net debt + equity)) of ~30–35%. Currently our estimates suggest that none are getting close to breaching leverage covenants of ~45–50%. OCA, ARV and RYM have also published interest coverage ratio (ICR) covenants of ~2.00–2.25x cash adjusted underlying EBIT. While gearing levels are similar there are differences, both with regards to the numerator (some version of a cash adjusted underlying EBIT) and the denominator (interest expense). Ultimately we do not expect any of these three to breach covenants. RYM and ARV are likely to be closest, due to more onerous covenant structures than OCA. As part of its capital increase, RYM received an amendment to its 2.25x ICR covenant until FY25 and also has fixed a large proportion of its debt for ~24 months. Post FY25, we believe RYM needs to have reduced its net debt in order to not get close to its ICR covenants. ARV's published covenants are the most onerous as they (1) are the highest (2.25x); (2) currently do not include all development gains; and (3) no part of the capitalised interest expense is excluded. Assuming ARV gets the technical amendement relating to its development gains (both OCA and RYM include almost all development gains), our modelling suggests that ARV will be close to but not below its covenants. However, should it need to, we expect a similar amendment to RYM. Longer term, for both RYM and ARV, they would likely need to either move some debt into a dedicated development facility like OCA or reduce the level of net debt in relation to EBIT.

Level of debt likely a key driver of performance over next 18 months — OCA and RYM best positioned


Outside of company specific details, we expect levels of debt and house prices to dominate the overall performance of the aged care sector over the next 18 months. While we remain cautious on near-term house price development we expect flat to declining levels of debt, a significant turn around from the last few years. If interest rates and construction costs remain high, we estimate that the sector has an attractive "out" by not starting any new build projects. This could result in the sector becoming largely debt free. Net debt makes up between 40% (RYM) and 50% (OCA) of enterprise value. Deleveraging can provide a powerful tailwind for the equity. While debt covenants can create some unease for equity holders, we believe they provide good discipline and an added incentive to reduce debt or at least reduce the speed at which it accumulates.

In theory an inflationary environment should be good news for aged care stocks


The core part of the aged care model is to use free funding from its occupational rights holders from one village to build a new village then rinse and repeat. An inflationary, high interest environment increases the value of this free funding. The 1970s was decade horribilis for equities, but house prices more than tripled in nominal terms in NZ. The future is uncertain and a key negative scenario for equities centers around inflation being more sticky than anticipated. Aged care operators that keep debt under control, grow by recycling cash and keep overheads low have the potential to perform well in a wide range of scenarios.

Run-down scenario provides an attractive back stop for the sector Run-down scenario provides an attractive back stop for the sector


The financial gearing in the aged care stocks has increased as the market value of equity has declined and interest bearing debt has increased. This high level of gearing has increased the risk/reward dynamic in the aged care sector; leverage works both ways. If this increased gearing was to be resolved organically i.e. through the release of cash tied up in development work in progress and unsold stock, it could provide signifiant tailwinds for the equity.

The aged care operators have taken notice of the increased costs of both debt and equity. The most significant action has been taken by RYM, which is also the operator that has built up the most amount of debt, in absolute terms and relative to assets. In February 2023, RYM raised over NZ$900m of equity to pay off its USPP debt and, more importantly in our view, announced a major pivot away from high density developments. RYM has also guided towards positive free cash flow in FY25, which would be a first since FY14. ARV and OCA have also signalled a slowdown in development and a more cautious approach to growth.

On our estimates OCA, ARV and, after the capital increase and strategy shift (pivot to less high density villages), to a large degree RYM, can pay down most of their interest bearing debt organically. This is through a combination of completing current construction, selling down unsold stock and collecting accounts receivables of stock that is sold but for which cash has not been collected (see our report "What If? Fast Track to Ex-Growth", published on 5 December 2022 for more detail).

This "wind down" of development operations would reduce EBITDA through lower development gains but increase it through earnings from the added units and from reduced costs and complexity. If these operators are able to achieve the exit EBITDA we estimate, pay down debt alongside the development run down, and trade on their current EV/EBITDA multiples, there would be a sizeable upside to the equity value over the next three to four years. And this is using today's depressed multiples.


The debt boom is (has to be) over


Focus across the listed aged care sector has for a long time been on growth. Specifically, growth in units, net asset values and underlying earnings. We believe that focus should be on, and is changing to, cash generation and levels of debt. In times of very low debt costs, rising property values and equity valuations at a multiple of book value, growing fast with borrowed money, is a rational prioritisation.

Today the world looks very different. All aged care operators are valued below tangible book value, house price inflation is negative and the aged care companies are raising incremental debt above 6%. In this environment we believe share price performance will be partly driven by an ability to generate free cash flow and reduce net debt.


Interest expense increasing but manageable


Net debt to annuity earnings has approached ~8x as the aged care sector has more than doubled net debt to ~NZ$4.5bn, up from below NZ$2bn five years ago. The build up of debt has been matched by an equally rapid build up of assets (partly funded by equity), leaving asset leverage ratios (net debt/(net debt + equity)) largely stable at around ~30–35%. The exception is RYM prior to its capital raise. Looking ahead, we expect debt levels to stabilise. We forecast that leverage for both RYM and OCA will decline over our forecast period.

We forecast the weighted average interest expense to approach ~6% over the next two to three years and aggregate interest expense of close to NZ$200m, up from ~NZ$100m in FY22. OCA stands out as the one with the least dramatic increase in effective interest rate. It has both the highest starting point (FY22) and lowest end point (FY25). OCA fixed a large proportion of its debt in the first half of 2022 and has also chosen to leave its retail bonds largely unswapped, which leaves it relatively unexposed.

Even though most debt is supporting development work in progress (WIP) approximately half of interest cost is expensed through the P&L. OCA and ARV in particular expense a substantial proportion of interest expense (over half), likely as a consequence of most of the debt originating from acquisitions. For OCA we expect a slight shift to a higher proportion being capitalised as the development facility is repricing faster.


Will OCA and ARV follow RYM? We think not


RYM's capital increase raises the question, will others follow suit? We think not. Firstly and most importantly, the underlying issue with regards to RYM, according to our estimates, was that RYM did not fully recycle cash in its new developments. This is particularly so over the last five years, leading to a build up of core debt. Prior to RYM's change of strategy and capital raise, we estimated that it would be left with ~NZ$1.8bn of core debt should it finish and sell down current villages under construction. This compares to being largely debt free for the other three operators in a similar run down scenario (see our report "What If? Fast Track to Ex-Growth", published on 5 December 2022 for more detail). Secondly, our analysis suggests that none of the aged care operators will go below their interest covenants (assuming ARV will get its technical amendment, discussed at its 1H23 result).


ur understanding is that RYM and ARV have interest expense for all of their debt included in the ICR used for testing their covenants. OCA has a development facility that is excluded. Assuming ARV receives its technical adjustment, which we have no reason to believe it won't, all three operators will stay within ICR covenants on our estimates, but with a relatively small margin of error. We believe there is ample room for variations and/or restructuring so that a large(r) proportion of debt is included in more traditional development facilities, which are not subject to ICR covenants.

Ryman Healthcare (RYM)Ryman Healthcare (RYM)


Debt and interest structure


RYM's debt structure has changed considerably since its last result. RYM's capital raise in order to repay its NZ$725m of USPP debt, which was majority floating, and restructuring of its hedges/swaps on its remaining bank debt means we estimate it enters FY24 with ~70% of its debt fixed. We understand that this debt has been fixed at a weighted average interest rate of ~4.5%.

ovenant structure


As announced at its capital raise in February 2023, RYM has received amendments to its ICR covenants through to FY26. These amendments lower its ICR covenants to 1.75x through to FY25, 2.00x at 1H26 before returning to 2.25x in FY26. Using RYM's indicated adjusted EBIT (EBIT less non cash component of DMF) calculation and our earnings and interest forecasts we estimate that RYM's ICR will bottom out at ~2.00x in FY23, suggesting that these covenant amendments were needed.


Arvida (ARV)


Debt and interest structure


ARV has a relatively small portion of its debt fixed relative to OCA and RYM at ~40%. This leaves ARV as one of the most exposed to floating benchmark interest rates. Unlike OCA, all of ARV's debt is part of the same corporate facility and it does not make use of a development facility. We estimate up to ~75% of its debt is associated with developments.

Covenant structure


ARV currently has the most onerous ICR covenants of the three aged care operators assessed in this report. Its covenant of 2.25x is the highest and covers all interest costs (expensed and capitalised). We have calculated ARV's ICR with the assumption it receives the technical amendment flagged at its 1H23 result. With this assumption we estimate ARV will get close to its covenants but not breach them. Should ARV want more headroom on these covenants we see it possible for ARV to get a similar amendment to RYM or utilise a development facility like OCA.

Oceania Healthcare (OCA)


Debt and interest structure


OCA's debt has a high portion fixed through its two retail bonds and swaps (~86% in FY22). While this has led OCA to realise higher interest expenses relative to RYM and ARV in FY21 and FY22 we estimate this fixed portion should allow it to have a lower weighted interest rate over the next three years, given the increase in floating benchmark interest rates.

Covenant structure


OCA's interest coverage ratio covenants are structured differently to RYM and ARV given its use of a development facility. At its 1H23 result, OCA had NZ$165m of its bank in such a facility, interest on this debt is capitalised and excluded from any interest coverage ratio covenants. The use of a development facility as well as a high proportion of debt fixed at relatively attractive levels gives OCA substantially more headroom relative to RYM and ARV. Our analysis of OCA's debt profile has led us to reduce our estimates of interest expense relatively materially for FY24 and FY25.

[Muse]

Thanks for sharing GWD.
Jarden issued a similar report last week, explicitly forecasting ICRs. Despite ARV having relatively low gearing, their covenants are higher (providing less head room all things equal) and suboptimal based on what's included and what's not included in the numerator and denominator of the ICR calculation. So despite the low gearing they would appear to have the least amount of headroom, particularly as they aren't well hedged. Suspect it played a role in the huge volume last week.

[Rawz]

Thanks GWD.. OCA guru management team looking pretty good right now

[bull....]

thx gwd interesting read , all dependant on cashflow generation which in time we will know who does better as they all fight it out