MET - Metlifecare - one for the fundies?

[Scrunch]

Sometimes you have to check yourself. Are we being too exuberant about the value of MET. Maybe, but I think with the coming inflationery impact of government spending and the ever increasing older population (unless we reneg and go the way of sweeden) MET is a good hedge against what may be to come in our economy.

I have to beg to differ, MET is arguably among the worst inflation hedge candidates of all the listed retirement operators. As Beagle has pointed out multiple times, it has a fixed fee for life policy. This might be good for attracting people and keeping the units full. It however is financially problematic if NZ were to get a serious case of inflation. There may be an out clause I'm not aware of but there weren't any if's or but's on the website link below.

https://www.metlifecare.co.nz/why-me...are/assurances

Resales are under 10% of existing unit numbers. This appears to indicate residents stay for over 10 years. In a low inflation environment the fees set ages ago are still sensible and cover current costs. Its probably not a big issue if the spike in inflation is to 2-3%, but what if we get 5 or 10% inflation for a few years. A 10% profit margin could reverse to 10-20%+ losses (that could then continue for many many years). This could destroy literally hundred's of millions of dollars relative to fees that increased with inflation.

But don't worry, we haven't had inflation in the last five years so it won't happen.

[Beagle]

Average tenure is 9.1 years according to the most recent report. The average age of residents right across the villages is now 82 years old. Since changing the minimum entry age to 70 years many years ago, (used to be as low as 55 years), the tenure is steading declining. The average age of residents to their brand new Red Beach village is 77 years.

SUM are the only retirement company holding out around this fixed fee for life thing and they think its not costing them sales. Put simply, I truly believe they are dead wrong. I can expand a lot more on this subject if people want me to.

SUM believe that capping the weekly fee increase at the rate at which national superannuation goes up doesn't cost them sales. There are a number of very powerful psychological and emotional factors at play here that SUM do not appear to understand despite extensive efforts on my part to help them.

I will list a few of the main key factors.
1. Old people absolutely crave financial certainty. There are so many uncertain things when you get older to worry about, principally one's health and healthcare costs but also around emotional needs and social companionship.
2. They know very well that their national superannuation will go up every year but they also know their health care costs are likely on average to increase at vastly more than the inflation rate so the extra financial security of a fixed weekly fee for life gives them an ever increasing annual buffer to weather any healthcare issues.
3. Many people of the age that are going into retirement villages have grown up in a post great depression era as children and learned to work with very strict budgets. Many budget everything down to the very last dollar. Fixing weekly fees for life is a very powerful marketing tool as residents know they will have a steadily increasing level of disposable income, (through annual increases in their national superannuation) to enjoy in their latter years.

Most retirement companies pitch the weekly fee at the mid point of the stay of the resident, e.g. if they know the weekly cost is presently $140 per week, they will add 4.5 years inflation at say 2.5% per annum and pitch it at a weekly fee of whatever that works out too, so they are ahead in the first half of the residents expected stay and behind in the second half.

The smarter retirement companies of which RYM are the most shrewd actually discount the weekly fee from current cost as a massive carrot and price all the inflation expectations around weekly fees into the up front unit cost.

MET are on the right track here. SUM have been unknowingly and unwittingly shooting themselves in the foot for years around this issue and SUM's poor sales rate for many years is the net result.

[Scrunch]

Average tenure is 9.1 years according to the most recent report. The average age of residents right across the villages is now 82 years old. Since changing the minimum entry age to 70 years many years ago, (used to be as low as 55 years), the tenure is steading declining. The average age of residents to their brand new Red Beach village is 77 years.

SUM are the only retirement company holding out around this fixed fee for life thing and they think its not costing them sales. Put simply, they are dead wrong.

Its good that MET are looking to increase the average age of residents - this should assist to turn over units more quickly and clip the ticket through resales of existing units more quickly. The past decision to open up units to people 55 years old was simply nuts. You could have someone living there for 40 years!!

In a way its also good that MET is in the same boat as other operators if they all have fixed fees (except SUM). That doesn't however remove the risk of high inflation from MET or the sector in general (although the probability of this still appears very small at present).

It is an interesting question because the economic textbook said printing money as they did during the GFC would ignite inflation. Except it didn't and no-ne could really explain well why inflation didn't happen. While its not quite GFC mk2, some governments are going down the same printing money (aka quantative easing) approach.

[zacman]

Not sure if this is already posted, but there is some serious bad blood between metlifecare and APVG.

https://www.google.com/amp/s/amp.rnz...a-a6b5acb27139

I believe Mr Ellis is simplifying the problem, undoubtedly for the benefit of his shareholders but also to put on a strong litigious face.
I have not read the Deed but to suggest that there is no MAC because it's just the economic conditions and it has not impacted MET disproportionately with other operators seems simplistic. Whether or not others are affected would not detract from it being a Material Adverse Change for MET. The issue is the impact on them, not others.
Everyone maybe materially affected. The MAC would still apply.

zacman

[peat]

It is an interesting question because the economic textbook said printing money as they did during the GFC would ignite inflation. Except it didn't and no-ne could really explain well why inflation didn't happen. While its not quite GFC mk2, some governments are going down the same printing money (aka quantative easing) approach.

Shares and property have experienced inflation after the GFC.
But excluded from CPI so it doesn't increase the super.

[Beagle]

In theory, on paper, (excuse the pun), if the GFC caused a loss of XYZ and you simply printed XYZ and gave it to the people who lost it then there should be no change to the inflation rate.

This time if we're in some form of GFC - MK2 it looks like they might be printing ABC so the jury is out on whether that will be somewhat inflationary. More likely they will need some very efficient way to increase the tax take so increasing GST to 20% after this major exercise in social engineering is probably the easiest and one of the most efficient taxes, but unfortunately is also somewhat inflationary.

I started buying MET in the low $4 range in late 2019 well before there was any talk of a takeover. I continue to believe there is real long term value at this price.
Disc: 12.4% portfolio position, (my self imposed maximum on any one share is 14%).

[Panda-NZ-]

In theory, on paper, (excuse the pun), if the GFC caused a loss of XYZ and you simply printed XYZ and gave it to the people who lost it then there should be no change to the inflation rate.
]

I have concerns about impacts on the young particuarly. We need risk supportive people to be starting up businessses rather than those close to retirement and vulnerable to covid.

With loan repayments + GST + PAYE it will be in the range of 40-50% for those people and 0% for property holders in effective terms. Maybe a broadening of the tax base is called for while the prices remain low.

[allfromacell]

I believe Mr Ellis is simplifying the problem, undoubtedly for the benefit of his shareholders but also to put on a strong litigious face.
I have not read the Deed but to suggest that there is no MAC because it's just the economic conditions and it has not impacted MET disproportionately with other operators seems simplistic. Whether or not others are affected would not detract from it being a Material Adverse Change for MET. The issue is the impact on them, not others.
Everyone maybe materially affected. The MAC would still apply.

zacman

It may seem simplistic but it is exactly what's written in the deed (attached with highlighting). I'm certainly no lawyer but it does spell it out quite simply I think.

Attachment 11397

[King1212]

So complicated...black and white. Any lawyer here that can just tell us.. whether we will win the case or not?

[allfromacell]

So complicated...black and white. Any lawyer here that can just tell us.. whether we will win the case or not?

I guess there will be dispute about the use of 'general'. It states the MAC is not valid if the change in NTA / earnings is due to 'general economic conditions'. Now we're currently in the middle of a pandemic with countries globally in a state of emergency, it's clear these times are not normal but as I read it that's not relevant. What is relevant is that the drop in NTA / earning will be due to a change in general economic conditions regardless of what caused that change, these changes are not disproportionately affecting MET.