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  1. #41
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    Quote Originally Posted by Sauce View Post
    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.

  2. #42
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    Quote Originally Posted by Lizard View Post
    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
    Last edited by Sauce; 30-10-2011 at 07:40 PM.

  3. #43
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    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.

  4. #44
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    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.

  5. #45
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    Quote Originally Posted by Lizard View Post
    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!!

    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
    Last edited by Sauce; 31-10-2011 at 11:10 PM.

  6. #46
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    Quote Originally Posted by Lizard View Post
    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

  7. #47
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    Quote Originally Posted by mamos View Post
    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
    Last edited by Sauce; 01-11-2011 at 10:19 AM.

  8. #48
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    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!

  9. #49
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    Quote Originally Posted by macduffy View Post
    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

  10. #50
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    Quote Originally Posted by Sauce View Post

    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

  11. #51
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    I now hold SUM too

  12. #52
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    Quote Originally Posted by SparkyTheClown View Post
    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

  13. #53
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    Good to see one of the directors has been buying on market , even if the amounts are small

  14. #54
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    Quote Originally Posted by SparkyTheClown View Post
    And that's a great announcement from CEO Norah Barlow this morning.

    https://www.nzx.com/companies/SUM/announcements/226217

    “Sales are strong. Last year sales were the highest in the company’s history. We are on track to exceeding that record,” Mrs Barlow said.
    Over the half year, Summerset completed 68 new units across four developing sites. Its full year target was 155 units.
    “We have started building at our newest village in Dunedin and are in a good position to reach our full year target,” Mrs Barlow said.
    “The company is in a robust position and the team has been working incredibly hard over this half year. We are expecting to exceed IPO forecasts if trading momentum continues. We will keep the market informed throughout the course of the year.
    Most encouraging.Very positive future.

  15. #55
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    Quote Originally Posted by percy View Post
    Most encouraging.Very positive future.
    I thought they are paying out a small div but they push it to the FY

  16. #56
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    The most significant news for SUM shareholders, in my opinion, is the increase in development/new sale margins. If this trend continues and they can close the margin gap between them and RYMAN it will be a good sign for investors.

  17. #57
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    I cannot see them (retirement facilities) paying much in dividends because by their very nature...all excess cash will be used to grow their base business which is very cash reliant in having to fund new homes and properties... Constant forced growth means bugger all in dividends. Maybe in the future if they plateau out regards demand.
    Quote Originally Posted by Jim View Post
    I thought they are paying out a small div but they push it to the FY

  18. #58
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    Quote Originally Posted by BIRMANBOY View Post
    I cannot see them (retirement facilities) paying much in dividends because by their very nature...all excess cash will be used to grow their base business which is very cash reliant in having to fund new homes and properties... Constant forced growth means bugger all in dividends. Maybe in the future if they plateau out regards demand.
    Agree - Ryman has strong operating cashflows but it all goes back into development. Plus I dont think they pay much in the way of tax so they cant impute their dividends. [edit - just checked. Ryman doesn't impute at all which makes sense. The operating model of Retirement villages, especially historically when they use to be able to depreciate builds, meant they were always in a tax loss position.}
    Last edited by CJ; 22-08-2012 at 03:35 PM.
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  19. #59
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    Quote Originally Posted by BIRMANBOY View Post
    I cannot see them (retirement facilities) paying much in dividends because by their very nature...all excess cash will be used to grow their base business which is very cash reliant in having to fund new homes and properties... Constant forced growth means bugger all in dividends. Maybe in the future if they plateau out regards demand.
    RYM [and I expext SUM] pay out a small % of their profit.What you must consider is how wisely they put to use the money they don't pay out.If they can make 15% plus on that money you will enjoy great compounding profits,which will drive the SP.
    If you can earn over 15% you are indeed best to look at company's that pay out most/or all of their profit.

  20. #60
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    Quote Originally Posted by BIRMANBOY View Post
    I cannot see them (retirement facilities) paying much in dividends because by their very nature...all excess cash will be used to grow their base business
    Quote Originally Posted by CJ View Post
    Agree - Ryman has strong operating cashflows but it all goes back into development.
    Actually I believe RYM have a very healthy dividend payout ratio of 50%.

    The cashflows that are reinvested in villages over and above the other 50% of shareholders funds that is retained (not paid out as a dividend) represents cash from the refundable license to occupy, and could not be paid out as dividends anyway. It is this ability for RYM to "Recycle" its capital from village to village that allows it to generate such high returns.

    Would you prefer they paid out 100% of underlying profits? Not me. The 50% "shareholder funds" they retain for growth are able to generate a 30% internal rate of return. This is BECAUSE they can recycle the capital by generating ever growing refundable occupancy right cashflows.

    This is so so much better than getting more in the way of dividends, that you should consider losing your left arm to find businesses like it, particularly when the downside risk is reasonably limited (downside risk is arguable I suppose, but at least in my view).

    As an owner, I know I can't get a 30% compounding rate of return if I am holding the cash, so I prefer them to keep as much of their underlying profits as they feel they can safely put to work at those excess returns. That said, from my perspective, Ryman (and perhaps SUM also) are, and will always be, a great payer of dividends. With those dividends growing fast.

    Regards,

    Sauce

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