RYM - Ryman Healthcare

[allfromacell]

A bit more director buying happening at the moment - this should help alleviate concerns re: balance sheet.

It also confirms no suitors are kicking the tyre's in a serious way.

Lack of insider buying in ARV / OCA is interesting.

[Balance]

Open kimono by Ryman's Chairman on what happened - lots of smoke and mirrors in the past and finally reality.

Arvida has joined Ryman in facing reality (to a certain extent - still more downside yet).

Oceania is waiting for a new CEO to do a clean up.

https://www.youtube.com/watch?app=de...e8Ju2JRICXmEuz

[kiora]

https://www.nzherald.co.nz/business/...C2MKP5VHRRYOY/

[kiwikeith]

https://www.nzherald.co.nz/business/...C2MKP5VHRRYOY/

Very interesting interview. The chairman can definitely talk the talk and as he points out it is now up to Ryman to prove they can deliver on a financial front.

[whatsup]

https://www.nzherald.co.nz/business/...C2MKP5VHRRYOY/

Talk fester !

[nztx]

Very interesting interview. The chairman can definitely talk the talk and as he points out it is now up to Ryman to prove they can deliver on a financial front.

how many freebie 'what have you's' does he have under his belt already?

Any further performance jobs sitting ready to fall off the shelf into pocket on the short - medium term radar ?

A few years ago was always curious on the way this sector was propped up on the corner of the table, but then again didn't think some of sector suspects would become basketcase jobs with huge monkeys around their necks gasping to get their 'actual Ca$h' results across the line

[MauroNZ]

How long ago was this company describe like the perfect investment?.

[Habits]

https://www.rymanhealthcare.co.nz/ju...display_june24

Valuable recommendation

[whatsup]

I find it very hard to believe that F B could made a comment that RYM could/would post a 300% increase in two/three years time when it has apparently lost the mantel to Sommerset , could some please post this so called report ?

[Greekwatchdog]

I find it very hard to believe that F B could made a comment that RYM could/would post a 300% increase in two/three years time when it has apparently lost the mantel to Sommerset , could some please post this so called report ?

Here you go
Reliable, accurate and relevant metrics are crucial to the valuing company. For the listed aged care operators, opaque and unusual representation of value creation has moved from a nuisance to business-critical. There has been a near total loss of investor confidence in the aged care operators' ability to generate value for shareholders. The loss of confidence is understandable, given weak cash generation, but is misguided. Equity holders capture the vast majority of the value created by village assets; this has not and will not change. The value creation is poorly captured by traditional accounting standards, and accordingly the industry has developed alternative metrics. Ryman Healthcare (RYM) has made it clear that it wants to move away from the current norms of how underlying earnings are reported. It has given some indication of what it intends to move to. RYM has a generational opportunity to lead the market towards new, more useful metrics. It is crucial that RYM guides the market to what it sees as a relevant earnings metric; one that is reliable, relevant and accurately reflects the unique value creation that sits with the equity holders of retirement villages.
Equity holders get almost 100% of the value created
As an equity holder in a retirement village operator you receive nearly 100% of the value created by the assets. This unique business model is what drove (previous) sector bellwether RYM to trade on an average ~2.5x net asset value, or a market cap of nearly ~1x assets, until 2022. The market cap today is less than a quarter of assets, but the basic attractive fundamentals remain intact. We see a path to a return on assets of ~4% (excl. impact of free funding) with a real growth of ~+5%; almost all of which accrues to the equity holder over time. These dynamics are not well captured by current accounting standards, but the market has lost confidence in the alternative metrics. We believe the solution is to move towards more transparency, better cost allocation and a clear separation between existing operations and development. The initial signs from RYM's new management is encouraging, but a lot hinges on RYM getting the settings right.


All models are wrong, but some are useful
This applies to statistical models as much as financial ones. The three financial statements: balance sheet, profit and loss, and cash flow, create a useful model. For the aged care operators this model is an unusually poor representation of the business. We have cross checked net asset values (NAV) with alternative approaches, and conclude that reported NAV is unlikely to understate the economic reality. We have also taken a hard look at resales and new sales gains, the non-GAAP measures that dominate village earnings. We agree with RYM that new sales gains do not belong in the P&L, but argue that (net) resales gains and Deferred Management Fees (DMF) do. Abolishing resales altogether, and/or switching to cash accounting, as RYM has alluded to, does not accurately reflect value creation by the villages. The simplicity of cash accounting is tempting, but there is a reason why we have three complimentary financial stateFinding the right metrics to value village earnings
Reliable, accurate and relevant accounting metrics are crucial to valuing any company. Not primarily for transparency reasons to reduce risk, but for outside investors to understand how or if value is being created by the business. There are several >US$100bn companies with negligible free cash flow and no dividends. All based on a set of accounts — not all of which are audited. For aged care operators, poor and unusual representation of value creation has moved from a nuisance to business-critical, with regards to village earnings which make up ~80% of the value of the aged care operators. There are three overarching issues:


The economic value add attributed to equity holders by owning a retirement village is complex in nature and poorly represented by current accounting standards;
This has resulted in a cottage industry of largely non-GAAP measures which have led to opaque and, to some degree, inconsistent reporting of underlying earnings and cash flows;
Cash flows from village earnings are long dated. We estimate that it takes 10–15 years for a village to reach maturity after development.ments. Together, they create a useful model to analyse corporates. RYM should not shy away from this complexity.
At its core, equity holders of a retirement village capture close to 100% of the value add delivered by the village assets. Current market valuation of RYM is less than a quarter of assets, suggesting that the market has totally lost confidence in RYM's ability to generate acceptable returns from its assets. We disagree. We expect that RYM will deliver a ~+4% return on existing assets (excluding the impact of free funding from ORAs) and ~+5% real growth. This gives a total growth in nominal assets of ~+9% to 10% annually, >90% of which will accrue to equity holders over time.


A plethora of increasingly innovative metrics have become the norm in the sector ...
The listed aged care sector in New Zealand is unusual, in that historically 80% to 90% of the underlying earnings that companies have guided the market to are non-GAAP. This reliance on almost exclusively non-GAAP measures for profitability is, to our best knowledge, unprecedented for largely mature businesses. And it comes with temptations. Temptations that the sector in general, and RYM in particular, has fallen for. With increasingly innovative reporting of underlying earnings in general, and new sales gains in particular. But there is a reason why this cottage industry of unusual metrics has been developed. The aged care operators create value for shareholders in a way that doesn't align very well with traditional accounting.
.. but there is a reason for why these metrics have been developed
The three core value drivers, making up >95% of ‘revenues’ and comfortably >100% of earnings of a stable village, relate to the non-cash metrics of Deferred Management Fees (DMF), the free funding from residents (which is only accounted for as not paying interest), and the increased value of its assets (which comes through in lumpy and opaque revaluation gains).

The equity holders of RYM and aged care operators more broadly capture nearly 100% of the returns delivered by its assets. Both the value of the assets and the ability to generate any meaningful returns from these assets have been called into question over the last three years, as RYM has derated from ~2.5x net asset value to ~0.6x.


The financial statements are a poor depiction of village earnings
The financial statements are a poor depiction of village earnings
Within statistics, the expression 'all models are wrong, but some are useful' is common. The same could be said about the three financial statements: profit and loss (P&L), balance sheet (BS), and cash flow (CF). These statements will never capture all complexities of a sprawling business but serve as a crucial tool for analysis. However, financial statements, both audited and non-GAAP, are unusually poor representations of village operations of aged care operators.
Key Points:


RYM has challenged the established reporting standards of village earnings, potentially leading the sector towards better metrics.
There's a risk that RYM may go too far, creating new metrics that either misrepresent the complex value creation by village operations or are rejected by the market and other listed corporates.
To achieve a significantly higher market value, RYM must establish widely accepted metrics that accurately reflect its value creation. Current underlying earnings have not accomplished this, and there's no guarantee that new metrics will either.
Insights from RYM's new management suggest that they are on the right path concerning cash flow and balance sheet, but there's uncertainty about the P&L.
By addressing these key points, RYM can work towards improving financial reporting within the aged care sector and accurately representing the value generated by village operations.


The income statement or P&L illustrates the profitability of a company under accrual accounting rules. The balance sheet shows a company's assets, liabilities, and shareholders' equity at a particular point in time. The cash flow statement shows cash movements from operating, investing, and financing activities. (Corporate Finance Institute)


The profit & loss account is not necessarily overstating value creation, but it is opaque
There is one major issue (new sales gains) and two minor issues (resale gains and DMF) with how the aged care operators report their underlying village earnings. The three of them in combination, unfortunately, make up the lion's share of the village P&L and >100% of underlying earnings, as currently reported by the aged care operators. Below we outline the issues, but also our imperfect solution to how these issues can be partly overcome. We approach it with three main objectives, in order of priority:


To find a metric that we think best captures the ‘profitability of the company’.
To reuse as much as possible of current established standards, adopted by corporates, analysts and investors. We believe this to be an important consideration to increase the probability of widespread adoption.
The view that a simple metric (earnings/EPS) is to be preferred over more complex ones. This is particularly important when we consider international investors with, in some cases, less detailed understanding of the multiple layers of complexities inherent in the reporting by the aged care operators.
New sales margins are important; but are inconsistent and do not belong in the P&L
​​​​​​​New sales gains does not have a direct representation in either the audited P&L or the cash flow statement, with only a tenuous link to the balance sheet. Neither does it have any direct connection to future cash flows. Worst of all, it does not well represent the transaction that is taking place. A resident buying a right to occupy a unit for life also buys the right to access its various common facilities, both implicitly and explicitly (including the increasingly sought-after care facilities). Reported new sales gains separate the cost to build a unit from other village amenities, using cost allocation models that are not visible to analysts. This approach has resulted in the unintuitive experience we have seen from RYM in particular. RYM has only recovered around 70% of all capex despite reporting ~25% new sale margins. SUM recovers ~100%, but reports ~30% new sales margins. We view building villages as expansionary capex. The fact that the aged care companies recover a large proportion, often all, in pre-paid ‘rent’ and borrowings is a great attribute of the business model, but should not be included in the P&L statement. We do not, and have never, include new sales gains in our valuation, and applaud RYM's decision to walk away from this opaque metric.
Resales gains and Deferred Management Fees (DMF) are unusual in nature, but capture genuine value add to equity holders
Resales gains and DMF are two primary reported village earnings sources, with resales gains having significant implications for both cash flow and the balance sheet. Here's an overview:


Resales gains are non-GAAP but have a close and direct link to cash generated by the business.
Resales gains represent the increase in unit value accumulated during the previous resident's tenure, which belongs to the equity holders.
The value has been accrued over an average of seven to eight years, making it challenging to accurately represent this accumulation at the realization of cash flow.
Current models, such as ignoring resales gains, including lumpy revaluation gains, or accounting for imputed interest income, may be less useful.
Resales gains can be both overstated (as they don't include refurbishment costs) and understated (as they reflect the average accumulated gains over the life of the unit sold instead of current gains on all assets which would be higher in a rising unit price environment).
A potential solution is to include only the cash impact from resales gains or include resales gains less refurbishment costs in adjusted earnings.
Considering these factors, we believe that RYM will move towards a cash metric or an almost cash metric in the future.
The final key building block of village earnings is DMF. This is, contrary to the two ‘gains’ (new sales and resale gains), IFRS earnings, but is not without its own issues. The key word here is deferred. DMFs are accrued through the P&L over a five to eight year period, with the cash delivered at exit. This accounting practice has resulted in low cash conversion of DMF, ~50% for RYM historically. At steady state, we estimate cash conversion of DMFs to be ~80% (assuming no unit growth), not great, but not unusual for the broader market. Taken together, assuming the adjustment to resales gains discussed above, village earnings would have a cash conversion approaching 90%; higher than most growth businesses and on par with best in class. Cash accounting of DMF would lead to the unintuitive conclusion that higher DMF has no value until first sell down, which could be seven to eight years away.
Summerset (SUM) made the theoretically sound, but in our view unintuitive, argument that DMFs are paid up front and then accrued over the proceeding years. We appreciate theoretical arguments concerning earnings, as evident by our analysis; however, SUM's position introduces additional complexity to a sector already in need of simplified reporting and greater consistency in earnings and cash flow presentations.


The problem with the cash flow statement as reported by the aged care operators
Cash is cash and should not be possible to misrepresent. Yet, the aged care operators, largely through no fault of their own, have ended up with cash flow statements that are a poor representation of their businesses.


New sales cash flow is hard to account for, but should be categorised as investment cash flow recovery
The biggest issue related to today's reported cash flows is new sales. According to current accounting standards, the aged care operators include all new sales as operating cash flow. That is, build a village for -NZ$100m and sell it down for +NZ$100m and you have +NZ$100m of operating cash flow. Operating cash flow is meant to represent cash flow from ... operations. To some degree, a village operator could be seen as a developer with a build to rent model, potentially motivating this approach. But it is not a useful model to represent what is happening.


There are two problems, neither of which have an obvious and simple solution:


The majority of operating cash flow comprises refundable occupational advances, which eventually must be repaid. These advances are more akin to financing cash flow, resembling borrowing from residents.
The units in question are not being sold but are instead retained, further complicating the situation.
Pre-paid DMF (i.e. SUM's theoretically sound argument);
Pre-paid imputed interest (i.e. Australian accounting for Refundable Accommodation Deposits [RAD], also theoretically sound);
A discounted financial liability, to be paid at exit, accrued until an assumed exit after around seven years.
Using this approach suggests ~50% of new sales cash flow can be thought of as operating cash flow (through negative working capital) and ~50% as a financing cash flow. Does this help us understand the economics of the business better? It does not. It adds layers of complexity that impacts on both the P&L and the balance sheet (the imputed interest would be directly offset by accruing interest expense on occupational advances, treating DMF as pre-paid only distorts the cash generating capacity of existing operations).
With the spirit that a model should be useful, and that it will never be perfect, we think new sales cash flow should be considered as neither operating or financing cash flow, but rather as investing cash flow. This is a somewhat ugly compromise that has evolved over time as a standard analytical tool amongst analysts, investors and corporates alike. With varying degrees of consistency, all corporates now report or talk to cash flow from their existing operations, and cash flow from growth/development. We think this is a sensible approach that best captures ‘facts on the ground’. Most of the aged care companies have separate development banking facilities which they pay back as the villages sell down. This suggests that they approach and think of the new sales cash flow as repayment of capex (investment cash flow), rather than prepayments of operating cash flow/financial borrowing.


Capturing value of new sales best done in the multiples rather than earnings
How can we capture the value created by delivering new villages at zero net cash investment? SUM has been best in class for well over a decade, and can serve as a good illustrative example of the value created. SUM has grown its numbers of units by a CAGR of +11%, and the real value likely by more (as the quality, standard and location of the ILUs have improved over time) since 2011. In short, SUM has tripled real assets without adding any core debt or new equity, all while paying out ~100% of cash flow from existing operations in dividends. We have assumed SUM's statement that it has no core debt is correct, (i.e. all financial debt is backed by development assets). No asset heavy industry that we are aware of comes close to being able to deliver this level of self-funded growth.
SUM's (and the listed universe) response has been to include new sales gains in underlying earnings. In our view this is akin to including the value uplift of a debt-funded data centre, office building, or power station in underlying earnings. Tempting, with some theoretically sound arguments, but the benefits do not outweigh the many disadvantages. Rather, much like the case for a data centre business, the ability to grow with little or no equity capital should be reflected in the PE multiple rather than the EPS.


Separating between cash flow from development and existing operations is a useful model to analyse aged care operators
To value aged care companies, investors need a clear understanding of what earnings and cash flow from existing operations (i.e. delivered villages) it achieves. The concept of the non-GAAP new sales gains has likely evolved from the aged care operators view that delivering a village and recovering the cash in full is not a value neutral activity. We agree. The closest equivalent would be a REIT delivering an office building and recovering 100% of the investment in pre-paid leases and a holding deposit with a seven to eight year renewal option. At the renewal date the lease would increase by ~25% on average (resales margins). RYM has historically, and SUM currently, delivered villages at zero cash flow. We believe the most useful model to account for this unusual set of circumstances is to view this as highly capital-efficient growth. This stands in contrast to the average cash conversion of the value created by existing operations.


The issue with the balance sheet is not overstated assets
We do not (and have not) use asset based valuations for the aged care operators, but still view them as important. Moreover, many investors do use asset based approaches; a sensible approach given the asset heavy nature of the businesses. Asset values also (used to) function as valuation support when the aged care stocks were more in favour than they are now. Over the last two to three years, three out of the four main listed aged care operators have traded well below net tangible book value, suggesting a lack of trust in these values. We think for good reason. A purist could argue that the net asset values are what the market tells you they are. We argue that these assets are mispriced by the market. Our analysis suggests that the assets are unlikely to be overvalued, while it could be argued that the liabilities are overstated with regards to economic reality.
here are two major issues with the audited balance sheet:


Assets: The primary assets of village operators are investment properties, valued by two external valuers. Much like REITs, these values are subject to frequent revaluations using highly assumption-sensitive models.
Liabilities: Approximately 50% of liabilities consist of occupational advances, an unusual liability. These advances are financial in nature yet do not incur interest.
Independent valuation are highly sensitive to model assumptions
Contrary to REITs, there are less than a handful of credible valuers of village assets. While we do not doubt the integrity and professionalism of the two most heavily relied upon (CBRE and Colliers), there are inherent difficulties in accurately valuing village assets on a stand alone basis. The lack of relevant ‘arm's length’ transactions makes comparisons hard. Neither RYM nor SUM have ever sold a village. Furthermore, being a Ryman Village is a core part of the value proposition; not just for the brand strength, but (practically) through access to specialist care that may not be available in your specific village. Transactions of other villages only have limited read through. Another issue relates to non-village costs which are not included in valuation. To a meaningful degree these appear to be a necessary and variable cost rather than a fixed overhead. Head office costs have a high degree of correlation with the size of these businesses.
Another issue are long-dated cash flows. On our estimates, a village does not make any meaningful positive cash flows in its first 10 years, making DCF based valuations very sensitive to model inputs. Accurately estimating duration is hard, but we estimate it to be ~20 years for a recently opened village and ~15 years for a mature village. Model inputs by valuers made available to the public suggest discount rates for RYM of ~13%. This compares to REITs valuers that use ~8% to 11%. Reducing the discount rate from 13% to 9% on a 20-year duration asset would almost double the asset value. It is not necessarily that the valuers are using too conservative assumptions (we only know discount rates and unit price inflation), but that DCF models are extremely input sensitive for long duration assets. We use a cost of equity for aged care operators of 8.5% to 9.5%.


Alternative asset valuation three different ways takes you there, or thereabouts
There are alternative ways of thinking about RYM's main assets: investment properties (~80% of the balance sheet). Below we have outlined three such approaches.


Looking at likely replacement costs. We have inflated historical development growth investment cash flows with construction inflation as measured by Stats NZ cost of building new housing CPI index.
We have inflated achieved unit sales by NZ HPI.
We have estimated RYM's total square meters of built form and analysed the implied value per square meter.
All three approches take us close enough to the current reported investment property value ~NZ$8.5bn. All three approaches are highly imperfect, but give at least an order of magnitude indication that current asset values are, using these approaches, reasonable. While we acknowledge the substantial uncertainty built into the valuers' assumptions, the end result looks similar to the one we would have arrived at by examining these assets through a different, short-term lens.
Our three alternative approaches assume the following:


The community living experience does not contribute additional value; we are simply considering the square meters of concrete.
The ability to capture DMF does not hold inherent value. Although this may seem extreme, aged care operators provide services in exchange for the DMF.
There are no significant scale advantages to be considered.
While there's no definitive answer to the question of the assets' worth, our analysis suggests that the asset values reported by RYM are not significantly inflated.


How should we think of a liability that is perpetual and non-interest-bearing?
At the core of the aged care business model is occupational advances that provide the funding. As discussed above under the cash flow section, these can be thought of as some combination of pre-paid rent and lending, in relatively equal proportions. From a balance sheet perspective it is more straight forward; 100% of occupational advances are a liability. But it is an odd liability. With a going concern assumption it will never be repaid and carries no interest. They are not included when we (and market data providers) calculate enterprise value or net debt. Occupational advances are effectively, (extremely) long-term accounts payable.
An extreme position would be to value these occupational advances at zero, as they are perpetual and non-interest-bearing. As a financial instrument it would be close. If RYM were to sell the right to the net cash flow from its current occupational advances (excluding revaluation gains which RYM is accounting for elsewhere), a buyer would have to wait until the end of useful life of the unit that the occupational advance is backing to receive the cash flow. With 30 years and a 7% cost of debt, that would suggest a haircut of close to 90%. While this is extreme, this is the base case outcome for RYM. RYM will replace current occupational advances with new ones (book the increase as resale gains) and not pay back the principal until the unit is decommissioned.


A less extreme position is to look at the time to maturity of the specific occupational advances currently on the books, ~three to four years, and discount it by cost of debt. This approach would trim occupational advances by ~20%. This conservative approach would add a meaningful 25% to 30% (~+NZ$1.70 per share) to RYM's net tangible assets.


Development debt can be seen as off balance sheet
We are acutely aware and have been highly critical of the massive build up of debt in the listed aged care sector. The significant majority of which the aged care operators refer to as development debt, with varying degrees of convincing support material. All four listed aged care operators guide to 100% cash recovery of investment cash flow, including holding costs of land and capitalised interest of work in progress during the build phase. There is precedent for this. We estimate that RYM recovered ~100% of development capex, including capitalised head office costs, until ~2016. More importantly, we estimate that SUM has recovered ~100% since listing, and still is. Oceania Healthcare (OCA) and Arvida Group (ARV) are hard to estimate given their large number of brownfield developments and acquisitions. We estimate that OCA is ~100%, but ARV is meaningfully below.
RYM has made recovering 100% of all in-village capex at first sell-down one of its three pillars. We expect RYM to achieve this. With the risk of sounding too bullish, it is not a given to us that development debt should be deducted from assets to arrive at net asset value. Using the realistic but generous assumption that achieving ~100% all-in-cash recovery at first sell down, the interest expense associated with development debt will not (ever) be paid by equity holders. The aged care operators could place all development activities in a special purpose vehicle, which would have around zero net cash flow and simply transfer the finished villages to the existing operations. This is indeed how we believe RYM is thinking about its development activities on a go-forward basis.


Equity holders capture the returns of the vast majority of the balance sheet
In conclusion, we see stronger support for the asset values than for the liabilities from an economic reality perspective. Equity holders of aged care operators will capture the value created by assets, less core debt. In FY24 RYM reported assets of ~NZ$13bn and core debt of ~NZ$1bn–$1.5bn. The gap of >NZ$11bn is represented by a market value of ~NZ$2.5bn and NTA value of ~NZ$4bn. Small changes (up and down) of long-term return on assets (ROA) have an outsized impact on the equity value. We argue that RYM should, and eventually will, deliver ~+4% ROA on existing operations, with a self-funded real growth of +4% to 6% for a total increase in asset values of ~+9% to 10%. 4% ROA is low, and below funding costs, but this is excluding the imputed interest from the free funding which would take ROA to ~7% to 8%. That imputed interest would be fully offset by a financing cost; we prefer to ignore both.