Infratil's results last week showed the value of its stake in retirement village operator RetireAustralia fell between 8.4% and 10.9% from March to September.
That's an ominous indicator of what to expect when three of our four major listed retirement village operators announce their first-half results this week and next.
RetireAustralia's book value of its 50% stake in Infratil's accounts using the midpoint of the valuation range is now $430.4 million, down $35.8 million from $466.2 million at March 30.
Infratil's outgoing chief financial officer Phillippa Harford noted that there had been “some movement in risk-free rates,” meaning that rising interest rates have impacted on the independent valuation of RetireAustralia.
“We remain confident, though, about the way the business is performing and what the outlook is,” Harford said last week, adding that the business has been able to increase the pricing of its retirement units.
(Harford is moving to chair One NZ and is a director of Manawa Energy and RetireAustralia, as well as continuing as a partner at Infratil's manager, Morrison & Co.)
Infratil noted RetireAustralia completed building 158 independent living apartments in the first half and is on target to deliver 254 for the full year, as well as the first of its care hubs in the first quarter of 2024.
Backfilling care
RetireAustralia is in the process of backfilling a care offering across its 25 villages, delivering on the “continuum of care” model that Ryman Healthcare pioneered and which both Ryman Healthcare and Summerset have exported to Victoria. RetireAustralia's villages are in Queensland, New South Wales and South Australia.
Until the Kiwi companies arrived in Australia, that country's retirement villages were all based on a lifestyle concept with care being delivered by other organisations.
While there are some differences in Australia's housing market to NZ's, and the Reserve Bank of Australia may not be done raising interest rates yet, as RBNZ clearly has, its market, like ours, appears to have stabilised.
Also, like NZ, Australia is currently experiencing record net immigration and declines in the building of new houses, which is likely to put upward pressure on house prices.
The yet-to-be-formed National Party-led government is expected to be friendlier to the housing market than the previous Labour government.
The latest NZ statistics from the Real Estate Institute showed prices in October up for the month as well as the last three months. While sales remain sluggish, they were still up 8% on October last year.
However, prices were still down 14.6% from the November 2021 peak.
While share prices in the retirement village sector did perk up in the middle of this year, particularly Ryman's post its $902 million capital raise in February, they've come of the boil lately.
Tumbling share prices
Ryman shares have dropped from their $6.99 post-cap raise high in July to $5.70 yesterday, while year-to-date, Arvida's shares are down 8.8% and Oceania Healthcare's down 6.6%.
Summerset, which has a Dec 31 balance date and so won't be reporting this month, has performed substantially better than the rest of the sector with its shares up 10.3% year-to-date.
Analysts' previews of the sector were generally downbeat and with a strong focus on the various companies' cash flow, particularly on Ryman's – the company has said it doesn't expect to be cash-flow positive until the 2025 financial year.
Ryman kept only $30 million from the capital raising, with another $30 covering the costs of the issue and $874 million going to repay its US private placement debt that had a book value of $708.6 million – USPPs usually require borrowers to “make whole” what the investors were promised when the debt was issued.
Ryman suspended dividend payments following the cap raise and Jarden analyst Arie Dekker thinks it's likely the company won't pay a first-half dividend either.
In a note published in early October, Dekker aslo questioned whether Ryman had raised enough capital.
In his preview published Nov 8, Dekker said he expects sales in the sector will have remained sluggish, notwithstanding that underlying demand for the retirement product remains solid.
Certainly, Summerset's September quarter sales report noted the residential property market had been “unpredictable at times.”
Summerset sales
Summerset sold 260 units in the latest quarter, 133 of them new sales and 127 being resales, with the total up 19% from 219 in the September quarter last year.
Dekker is expecting prices of retirement units to hold up – the operators didn't increase their prices significantly during the post-covid housing market boom, giving them a significant buffer when the market turned down.
But he thinks that sluggish market conditions are likely to drive higher debt levels. As well, the larger companies tend to repay departing residents much faster than the smaller operators, even though their contracts allow for much longer settlement periods, and well ahead of recouping the expense by reselling the unit.
One area he sees could be “a real opportunity” for Ryman is increasing its deferred management fee (DMF) – Ryman currently charges 20% compared with Summerset's 25% and Arvida and Oceania both charging 30%.
Ryman had already outlined its plans to change direction in late 2022, which includes reducing its emphasis on care beds and switching away from constructing high-rise apartments to more free-standing villas – it will be able to sell the latter as each is completed but with high-rise apartments, an entire building has to be completed first before residents can move in, meaning it takes Ryman a lot longer to receive the cash.
Unsustainable dividends
Dekker also sees Arvida and Oceanía's dividends as unsustainable, even though both companies “cut their full-year 2023 dividends meaningfully from full-year 2022 levels.”
Oceania cut its annual payout to 3.2 cents per share from 4.4cps while Arvida cut its to 4.85cps from 5.5.
Forsyth Barr analyst Aaron Ibbotson is generally more upbeat on the sector, noting in his preview published Oct 31 that three years ago, Ryman shares were trading at a premium between 20% and 40% to the smaller but faster-growing Summerset.
That situation has now completely reversed with Summerset shares trading at near a record 40% premium to Ryman.
“This suggests that the market expects no improvement in Ryman's care earnings or cash recovery of capex, the two areas where it has lagged Summerset,” Ibbotson said.
That means Ryman shares “presents some of the best risk-reward opportunities in the NZ market.”
He is expecting all three of the reporting companies to have “meaningfully reduced capex spend; in other words, showing they're controlling what they're able to control.
Overall, he expects to see an improvement from Ryman and Oceania with Arvida's results little changed.
The biggest unknown, in Ibbotson's view, is each company’s sales cash flow.
“We expect Ryman and Oceania to show solid improvements from a very weak first-half 2023 and for Arvida to show some deterioration, in line with its comments at its second-quarter 2024 update.”
Prices ahead of valuer expectations
Arvida said in early October that it sold 6% more occupation rights at 285 in the six months ended September and that the average sale price of the 183 resales was $549,000, lower than in the previous year because more care suites and lower-margin units were included, but that pricing was 4% ahead of that assumed by its independent valuers in March.
Ibbotson noted Arvida's comments 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.”
He's expecting another six months of negative free cash flow from Arvida but that there should be “a material improvement in cash generation.”
For Oceania, which reports on Wednesday this week, he expects its flagship, the $150 million The Helier development, will be the focus, though he isn't expecting many, if any, sales before Sept 30, but that there should have been “at least a handful” of post-balance date sales.
“The delay of The Helier will result in yet another period with increasing debt.” He's expecting it to rise by about $40 million to $585 million.
But for the full year, he expects largely flat net debt and positive free cash flow, “a first for many years for any of the listed aged care operators.”
Arvida reports on Tuesday, Nov 28 and Ryman on Wednesday, Nov 29.
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