RYM - Ryman Healthcare

[rmbbrave]

Ryman buys Nelson land
09 December 2005

Listed retirement village operator Ryman Healthcare said today it has purchased land in Nelson for its 18th village.


"We see Nelson as a very important New Zealand retirement centre and we have been looking for some time for a first class site in the city," development manager Ray Versey said.

The 4.4ha site in Stoke, Nelson, has space for up to 120 independent townhouses , 50 serviced apartments and a resthome.

The company posted a $17.1 million profit in the six months to September 30 – a new record.

Ryman shares last traded steady at $5.10.

[TheBossMan]

will do over the weekend. This additional 120 houses were not even factored in my valuation. I'll call the company on monday to see when the development would commence in Nelson.

One of the core competencies of Ryman is a quick turnaround time in construction->sales. They use in-house architects/builders, mostly from Christchurch. My understanding is, Metlife outsources most work.

Nelson unit prices will sell higher increasing the RNOA. It'd also contribute more in the 20% management fees built in to the occupancy advance.

People sitting on the fringes or thinking that this is a boring/saturated market, please re-consider. There is hardly any risk (even an isolated earthquake would not have a huge impact, considering the diverse locations), but much upside from here.

[TheBossMan]

Initiating coverage on Ryman: my investment horizon is 5 years. Valuation indicates a share price of $8.30.

Ryman has had a spectacular growth in the past five years. It is the #2 player in the fragmented retirement village industry. Around 2600 residents live in 1400 apartments. There's also 1200 rest home and hospital care beds.

Ryman's revenue streams are: sales of new units, re-sales when residents move on, management fees (4% deducted annually from the initial occupancy loan, for 5 years). Ryman does not include their income from property revaluation in their income statement. It is tucked in the shareholder equity statement.

Industry consolidation is happening. Regulatory environment is not so much a concern, on the contrary, increase in asset testing threshold will only benefit Ryman.

Ryman’s business model is sound (Read Harrys post on 15/06/2004); very concise, but it sums up everything. Ryman is good at acquiring run-down sites or land in good residential area. It then builds integrated facilities and promotes its units to people living within 10-15km radius. Elderly people (around 70 years) sell their home (at-market value), buys a unit (gives Ryman an interest-free occupancy loan) and still has some $$ to spare. There is no maintenance hassles from then on. Ryman sells a lifestyle and not an investment.

The apartments/units’ turnover is 6-7 years. Then, the residents move on to aged care or move on (upto 20% is then deducted from the initial loan and Ryman refunds the remaining $$). Ryman then re-sells the occupancy right (at-market again).

Ryman’s core competencies include: in-house construction team, capable of building modular units, reduced cost structures. Their MD is an ex-detective and is quite adept in getting good sites. They have a very good board that backs the senior management. Read James K’s post (30/07/2004) – not sure what Metlife did, but Ryman has a director who is an accounting professor & was also an NZX director. So it helps with auditing, transparency, and clean accounting practice.[^]

Ryman wants to grow 15% per annum; they have achieved more than that the past five years, and also demonstrated by the latest half-year report. 250 units a year is their target and they have a land bank to cater to that. Without any new land acquisitions, that’s 1250 more units in 5 years.

For the financial year 2005, Ryman’s total revenues were $121 million, including care fees (29%), sales of new units (25%), re-sales of units (22%), and deferred management fees (5%). Sales were generated from NOA of $235 million, with an operating profit margin of 45.2% and asset turnover of 0.57. Comprehensive income (operating income + property re-valuation income) reached $52 million. Residual operating income (income less the required rate of return for its net assets) amounted to $36 million in 2005, shareholders equity of $185 million and total assets $243 million.

The last five years:
CSE has increased 20% per annum and has doubled $79 million to $186 million. Net financial obligations remained around $50 million for the five years. Average ROCE is 23%. RNOA has been 18%. Revenues increased on average by 22% annually from $60 million in 2001 to $121 million in 2005. Operating profit margins typically ranged between 35% and 45%. Asset turnover ranged from 0.37 to 0.58 with an average of 0.48.

Future prospects:
Demand is huge for retirement village units. Most apartments are pre-sold pretty much throughout the country. Yes, the 65+ demographics will increase 3% per year till 2025 (baby boomers, more life expectancy etc.), but only 5% of the existing elderly people are in retirement villages. That’s where I see the growth coming from.[]

Strong growth prospects, coupled with management focus on expansion plans, augur well for the firm.

Valuation:
At $5.40 (CMP), the market is assuming pretty much no growth in residual operating income. Given that the firm has consistently delivered, my view is that the market somehow thinks Ryman is only a property play. P/E is 17x,

[rmbbrave]

That's a nice piece TB.

I bought my first parcel for 1.68 in June 2003.

[TheBossMan]

I hope you're still holding them. Wait till 2007 or so and top up more. There may even be a share buy-back at some stage.

[Placebo]

Nice work, Boss

Just wonder if you could elaborate on this:

quote:P/E is 17x, I think..but I look at comprehensive income and the P/E is 10x

What is "comprehensive income"?

Also, do you know what their debt/gearing level is (if any)?

Thanks in advance

[TheBossMan]

Comprehensive income = operating income + income obtained from any dirty surplus. In Ryman's case, they do not report their gains from property revaluations in the income statement. If you look at their shareholder equity statement, you'd notice a gain of $20-odd million by way of annual revaluation. This income should also be taken into consideration for valuation purposes. Other companies use the equity statements to hide losses or reduction in shareholder value(e.g., through share/options issues for employees).

Soon, Ryman and other firms would be required to disclose such income streams in the regular p/l statements. That'd only boost the share price!

Debt/Equity ratio is a modest .21, Debt/Total assets is .24, EPS 23.5. They have only $50 million in long-term debt as compared to net operating assets of $235 million. This is pittance compared to the amount they spend every year in development. As I stated, it is only possible because of their operating liability leverage (interest-free occupancy loans from residents).

See how the SP is resilient. Though it tested $5 recently, it has come back to $5.40 levels. Continue accumulating and dont forget to send me a christmas card next year.

[Placebo]

Cheers Boss. Thought that was the case re property valuations. Have to say, that was a nice surprise to spot in their Annual Report.

"Dirty Surplus", I like that

[KJ]

Some good info here-I note that the coy does not pay tax which must have implications down the track a bit.
Is this due to timing issues with say depn as they develop villages or are there other reasons? Are profits on the resale of occupation licences taxable?

[TheBossMan]

Taxation is not an issue now. Income from new sales and re-sales are deemed as loans/re-payment of loans, less deductions. The current government has not signalled any intent to review this policy. So, I expect that the industry is protected in this area for sometime.
With the continuing demand for retirement villages, I can also see Ryman and other industry participants pass on any such costs to its residents (or change its revenue model to get around the taxation).