Ok, maybe I had that wrong, I know I had to pay back some when I sold a house I built and rented. Maybe the grass was looking greener back then.
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Ok, maybe I had that wrong, I know I had to pay back some when I sold a house I built and rented. Maybe the grass was looking greener back then.
For Bars latest Review on sector.
The aged care sector has had another tough month, led by Ryman Healthcare (RYM) down ~-12%, re-tracing most of its post capital raise performance. Where to from here? We remain of the view that the sector in general, and RYM particularly, presents some of the best risk-reward opportunities in the NZ market. Over the last six months: (1) house prices and turnover have inflected; (2) the aged care association has reached its most favourable funding agreement with aged care providers for several years; (3) staff shortages have eased materially through record immigration; and (4) NZ has had an election with an outcome that is likely to be modestly positive for the sector. November will bring with it the aged care heavy earnings season, when all but Summerset (SUM) will report earnings. We expect ~+10% aggregate growth in annuity EBITDA and underlying earnings for FY24, and a substantial improvement in cash generation from a year ago.
While we acknowledge the aged care sector has had many challenges over the last 24 months, and that it continues to have some, we point out that: (1) the sector has de-rated by >50%; (2) against the many known headwinds the sector has delivered substantial aggregate growth in annuity earnings, underlying earnings and even book value; and (3) the demographic trends that are underpinning the long-term investment case for this sector have not changed.
Cash generation and net debt in focus — at below book value the license to continue to build can no longer be taken for granted
The three aged care companies reporting 1H24 earnings trade comfortably below book value. Hence, we expect focus to be squarely on the ability to control debt. The companies have three levers to control debt with: (1) cash generation from ongoing operations, primarily collecting cash from resales. We expect an improvement from RYM and Oceania Healthcare (OCA), and largely unchanged from Arvida (ARV); (2) capex, we expect meaningfully reduced capex spend from all three, controlling the controllable; and (3) new sales cash flow. This is the biggest unknown, but we expect RYM and OCA to show solid improvements from a (very) weak 1H23 and for ARV to show some deterioration, in-line with its comments at its 2Q24 update.
Care earnings — dare to dream
Three years of run-away opex growth, COVID challenges and inadequate funding increases has largely obliterated care earnings for the aged care sector. We estimate that EBITDA margins have declined from ~20% to low single digits. The last earnings seasons presented some glimmers of hope, with at least a halt of the continued deterioration. We expect that this positive trend will continue when the companies report 1H24 and accelerate towards the full year. We expect care EBITDA margins to accelerate to ~9% in FY24 versus ~7% in FY23 and for opex to decelerate to +8% YoY. The first absolute improvement in care earnings for several years.
Summerset now at a near record ~+40% premium to RYM on our preferred valuation metric of EV/annuity EBITDA
Three years ago RYM was trading at a +20%–40% premium to the smaller but faster growing SUM (depending on the valuation metric). The reasons given at the time was a combination that RYM had a stronger brand, longer track record of organic growth, a more established presence in Australia, and a superior care offering. The premium did not make sense to us given SUM's superior cash recovery of capex and, therefore, faster growth. Today the situation is largely reversed. SUM is valued at a +20–40% premium to RYM depending on the valuation metric. In our view, this suggests that the market expects no improvement in RYM's care earnings or cash recovery of capex: the two areas where it has lagged SUM. We continue to view SUM as well positioned but struggle with the relative valuation: (1) RYM has delivered faster annuity EBITDA growth over COVID; (2) on our estimates RYM will be FCF positive in FY25; and (3) RYM has an established presence in Australia with decades of unencumbered growth ahead. This is offset by SUM's superior cash recovery of capex, more capital light development model and therefore ability to grow faster. We value both companies on the same multiple. We make minor downgrades to our estimates and reiterate our OUTPERFORM ratings on RYM, ARV and OCA.
Housing market appears to have reached an inflection point
Sales updates and comments
Both SUM and ARV have released their new and resale numbers for the six months covering 1H24 (period for RYM, ARV and OCA). SUM's update was solid, with resales increasing +25% YoY and +18% sequentially (after adjusting for a March YE), new sales also showed signs of an improved residential market, up +12% YoY, both broadly in-line with our expectations. ARV's sales were not as strong, with resales up +12% YoY but down -12% sequentially, new sales were up +11% sequentially but down -3% YoY, these were slightly below our expectations and we lower our estimates with this update.
Additionally to these figures were comments made supporting the idea that the housing market has reached an inflection point. SUM stated, 'we’re seeing positive signs that the property market is improving'. Demand at its latest Auckland development, St Johns, opening next year, 'has been very high'. Winton at its AGM reported that pre-sales for its high-end Northbrook aged care developments are now over NZ$80m (up +NZ$30m in two months). Winton also stated that the NZ housing market is 'beginning to show signs of recovery' and Fletcher Building stated that there is 'potential upside' to its FY24 residential sales target if current sales momentum continues.
Ryman Healthcare (RYM)
Debt, cash flow and care earnings in focus
RYM's latest debt update stated that it had negotiated a change in its interest coverage ratio (ICR) covenant calculation to change the basis of the earnings from adjusted EBIT to adjusted EBITDA. This change, on our modelling, suggests that it is unlikely to breach covenants when covenants return to 2.25x in FY26, even when accounting for the recent increase in interest rates. Cash flow and net debt build will continue to be a key focus for RYM over the next few years. We estimate that RYM will add a modest amount of debt in FY24 as it finishes construction of several main buildings in villages that are unlikely to fully re-cycle cash. We expect a substantial improvement on FY23 and model early signs of its strategy shift paying off in its 1H24 result. We believe RYM can achieve its goal of positive FCF in FY25 (largely by controlling the controlables, notably capex), and continued positive FCF post FY25 is possible given lower high density construction and lower proportion of care.
Earnings changes
We make minor changes to our forecasts, slightly higher care fees offset by: lower new sales gains (our new ORA sales estimate decreased to 525 from 550 in FY24), higher opex, and higher interest costs. Annuity EBITDA remains broadly unchanged.
Arvida (ARV)
Interest costs, debt, and operating expenses
Arvida has already pre-announced its sales numbers (resales and new sales); hence, we expect focus to be on cash generation and costs. ARV indicated in its 2Q24 update that extended settlement times had continued to be a feature and that it hadn't seen a material change in behaviour from the slight improvement seen in the housing market. We expect another six months of negative free cash flow. That said, we expect a material improvement in cash generation from recent periods, primarily due to lower investment cash flow. We forecast an increase of +NZ$45m in net debt versus FY23.
Earnings changes
We marginally decrease our earnings estimates for ARV due to a combination of: lower resale gains following its 1H24 update, lower care fees, and higher interest costs, slightly offset in FY24 by higher new sale gains and lower D&A. Our net debt path also increases.
Oceania Healthcare (OCA)
Interest costs, debt, and cash flow
OCA's flagship ~NZ$150m development The Helier will likely be in focus. Large scale launch of the apartment sell down was not until late August. We are unlikely to see many if any sales in the 1H24 period, but OCA should have seen at least a handful after period end. The delay of The Helier will result in yet another period with increasing debt, we estimate ~+NZ$40m (to NZ$585m). For the full year we expect largely flat net debt and positive free cash flow. A first for many years for any of the listed aged care operators.
Earnings changes
We lower our forecasts on the back of lower resale gains (lower prices), lower new sale gains (prices and units in FY24), lower DMF and slightly higher interest costs (OCA has the lowest effective interest rate in the sector given its high portion of fixed debt, notably its retail bonds). Our net debt forecasts increase and we no longer forecast a fall in FY24 due to higher capex and lower cash flow from new sales.
Thanks greekwatchdog
Ditto...Thanks gw
see RV consents fell 7% , wonder which companies pulling back the most
ANZ Property Focus Report says housing market is weak, revises house price expectations down
https://www.interest.co.nz/property/...e-expectations
no wonder all RV stocks heading down again
Rumour has it that Summerset are looking at buying and developing half of Gulf Harbour Golf Course.
There is an encumbrance restricting the land to being a golf course only for 999 years.
The Land is unstable as it was constructed for Golf Course loadings.
The local community are outraged.
It's an interesting story, Banned company Director Greg Olliver is involved, Summerset, if involved, should be very careful. Google for details.
I wonder at what point any of the listed RV operators would consider their business "mature" and that they have reached an optimum size operationally, such as to withdraw from new development and consolidate to focus simply upon their residents and shareholders, and reduce risk accordingly?
At the moment development capital expenditure is the major cash outflow for all, with management seeking to structure development projects to ensure capital commitments match capacity limits whilst maintaining high build rates and keeping costly land banks on hand, and churning sales and resales as fast as market forces allow. Those where rest home beds predominate are (rightly) pivoting away as fast as they can so as to minimise dependence upon government funding support.
Some of the stresses the current approach delivers to shareholders have been manifesting. And this despite the demographic tailwinds blowing hardest just now. I would have thought that targetting, say, 2030 to scale back and consolidate to just operate then existing sites would be most beneficial to holders. I have the same view about listed property company entities where the share price has remained more or less static over decades despite buying, selling and developing over the intervening period. No doubt great fun for those involved but doesn't move the actual share price for more than a generation. Compare that with the outcome for those who buy or co-own a single property and divest after the same timespan and invariably the capital return is far higher.
Of course there are benefits to society/the aged community from the current approach but why should investors be responsible for that? So what is the endgame here, or indeed is there an end point envisaged at all or do we just continue until population growth and home ownership rates drop to unsustainable levels and the model fails? Interested in what current investors in the sector think given dividend growth/returns are no longer market leading.
I think of Fonterra and it's world domination approach under previous management and I see exactly what you are saying. At some point its just upgrades and modernization but there is massive population growth expected in the near future. I bet the scenario you are considering is well over a decade off.