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Originally Posted by Sauce
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.
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Originally Posted by Lizard
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.
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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.
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Member
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.
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Originally Posted by Lizard
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.
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Originally Posted by Lizard
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
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Originally Posted by 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.
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.
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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!
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Originally Posted by 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!
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
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