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Ryman Healthcare: service provider or property play?

Ever since Ryman Healthcare listed on NZX in 1999, analysts have been divided on whether the company is a property play or the provider of an essential service delivered through property management and development.

Since the company keeps building apace, there are certainly valid arguments that Ryman is a property development and management company.

It has sites for 16 new villages in the pipeline – and now manages 33 existing villages with more than 10,000 beds in facilities ranging from independent living units through to hospital and dementia beds.

Ryman’s essential proposition is that when its residents move into a village, they will never have to move house again because that village offers all the care they will need, regardless of what happens.

It’s a business model that has proved much more solid and predictable than the lifestyle-type model still dominant in Australia where residents can remain in villages only while they’re healthy enough to live independently.

That model appears to have had its day in New Zealand and the Ryman model appears to be working well in Melbourne too, albeit that progress has been slower than expected.

Ryman chief financial officer David Bennett explains that his company was a bit slow to begin with as it learned how to operate in the Australian environment.

One major difference is that Ryman has to get entire villages approved before it can start construction in Melbourne whereas the consenting process in New Zealand allows it to build in stages, Bennett says.

The company bought its first site in Australia in November 2011. It officially opened the Weary Dunlop village in August 2014, although the village was still under construction at the time.

The second Melbourne site was bought in May 2011 but construction didn’t begin until April 2017. The first residents moved into what is now the Nellie Melba village in August this year – the official opening hasn’t happened yet.

Bennett says momentum in Melbourne is building – the company is about to start construction of two new villages, has started seeking consents for another three and just bought its ninth site there last month.

The greater Melbourne population is the same as New Zealand’s total population and that means Ryman can build villages in close proximity, unlike in New Zealand, Bennett says.

And that’s helping with marketing Ryman’s “continuum of care” model.

When releasing its first-half results last month, chief executive Gordon MacLeod said Ryman will keep its promise of having five villages open in Victoria by 2020 – he did joke that might take until New Year’s Eve in 2020.

Back in New Zealand, Ryman has enjoyed the sincerest form of flattery in that its major New Zealand competitors, such as Summerset, are copying the Ryman model. In the case of companies such as Metlifecare and Infratil-owned RetireAustralia, they are slowly converting from the lifestyle model to that of Ryman’s.

But Ryman would claim it’s still streets ahead.

In releasing its first-half results it included a chart showing that 74 percent of its New Zealand villages operate under four-yearly audits by the ministry of health – similar to warrants of fitness for cars – what it calls the ‘gold standard.’

Newer villages operating for less than four years have to build up a track record through more frequent audits before they can reach that gold standard.

Its nearest rival among operators with 15 or more villages, labelled simply ‘provider E,’ has four-yearly audits of 44 percent of its villages.

And demonstrating Ryman’s heavy emphasis on care, more than 34 percent of its units and beds are in care facilities, excluding serviced apartments. That figure rises to 53 percent when serviced apartments are included.

Summerset, roughly half Ryman’s size, can accommodate a little more than 17 percent of its residents in care beds. It has just applied for resource consent to build a fourth village in Hawke's Bay which will have 241 self-contained independent living units, 56 one-bedroom assisted living suites and 43 care beds.

Ryman says that’s only about a third of the care beds it would build in a typical village.

Although Ryman has been listed on NZX since 1999 – and prides itself on the fact that it has never needed to raise any more than the original $25 million – the way analysts rate Ryman varies greatly.

Arie Dekker at First NZ Capital, for example, has an ‘underperform’ rating on the stock and a 12-month target price of just $9.13.

Ryman shares are trading at $11.35, well above his target, although down from their record $14.09 in August.

Stephen Ridgewell at Craigs Investment Partners is somewhat more sanguine with a still-under-water $10.55 12-month price target.

At the other end of the spectrum, Jeremy Simpson at Forsyth Barr has a $12.60 12-month price target.

Dekker says Ryman clearly has a large business servicing its residents’ needs but “that’s not where the economics come from,” which is the property development side of the business in his view.

He is also concerned about the slowdown in growth of net tangible assets (NTA) per share – per-share net assets at Sept. 30 of $4.056 was only 5.6 percent higher than March 31 when annual growth was 17.5 percent. In the year ended March 2017, net assets grew 24.5 percent.

And Ryman’s debt is rising – its gearing ratio rose to 37 percent at Sept. 30 from 35 percent in March and has been trending higher from 23 percent in 2014.

“Is there potential for a de-rate of Ryman on slowing NTA growth, increasing debt, increasing reliance on new sale gross occupancy growth in what might be a slowing market and in the absence of above-trend property price growth?” Dekker asks.

Australian housing markets are definitely in the midst of at least a correction.

Melbourne house prices have fallen 5.8 percent from their peak a year ago. The OECD has warned the Australian government it needs a contingency plan in case the correction turns into a crash and hurts the wider economy, even though it is forecasting a soft landing.

However, ANZ Bank’s chief economist David Plank recently changed his forecast and is now expecting a 15-20 percent fall in house prices.

Nevertheless, Ryman has consistently argued that the decision to move into one of its villages is based on need that doesn’t disappear because of a property market downturn.

Housing markets where its villages are located would have to be exceptionally dire before it prevented would-be residents from selling their own homes and moving into a nearby village.

Ryman's first-half result presentation included a slide showing the median house price in Melbourne is approaching $1.3 million. The cost of one of its two-bedroom units in Melbourne, designed for independent living, is a little under $900,000 while a serviced apartment is $600,000 and that pricing was somewhat less favourable in Auckland.

And the Victorian government is predicting its population will continue to grow at more than 100,000 people each year.

Forsyth Barr’s Simpson notes that “there is no shortage of demand” for what Ryman keeps building, particularly in what he calls “a Rymanian invasion of Victoria.”

He notes the company’s guidance for underlying profit growth in the year ending March of 10-17 percent and the fact it "confirmed its long-term goal to grow by around 15 percent a year, an astounding number, given the size of the business.”

Simpson also says a sharply cooling Melbourne market should benefit Ryman because it will limit development by less well capitalised operators and will also mean lower land prices and construction costs. He points to Ryman’s history.

“During the post-GFC period of 2008-2011 Ryman got a major jump on its competition, given its ability to continue to acquire sites, develop, sell down villages, keep its existing villages full and, importantly, recycle capital.”

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